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United States
Securities and Exchange Commission
Washington, D.C. 20549
___________
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended: January 31, 2000 Commission File Number: 000-23384
___________
Inso Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3216243
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
31 St. James Avenue, Boston, MA 02116
(Address of principal executive offices) (Zip code)
(617) 753-6500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Act: None
Common Stock, par value $.01 per share (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes: [X] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Class Outstanding at April 13, 2000
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Common Stock (par value $.01 per share) 16,609,048
As of April 13, 2000, the aggregate market value of common stock held by
non-affiliates of the registrant was $74,901,848.
Documents Incorporated by Reference
Portions of the Registrant's Definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III.
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Inso Corporation
Form 10-K
This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of factors
of which we are aware that may cause our actual results to vary materially from
those forecasted or projected in any such forward-looking statement. Please see
"Certain Factors that May Affect Future Operating Results" for a discussion of
certain, but not necessarily all, of the factors that we believe could cause our
actual operating results to be materially less than those forecasted or
projected in any forward-looking statement.
Part I
Item 1. Business
Inso Corporation ("Inso" or "we") supplies software solutions for the
management, exchange and dynamic delivery of business information and
applications. Inso has more than 500 corporate and original equipment
manufacturing ("OEM") customers, and more than 10 years of experience in XML and
structured content applications. As of January 31, 2000, we have two operating
divisions: eBusiness Technologies and Information Exchange. During the fiscal
year ended January 31, 2000, we also operated a third division - Product Data
Management. The Product Data Management division was comprised of technologies
we obtained in connection with our acquisition in 1998 of Sherpa Systems
Corporation, as well as technologies from the division formerly referred to as
Electronic Publishing Solutions (see "Product Data Management Products").
During fiscal year 2000, we decided to focus more of Inso's resources on
opportunities in the markets served by the eBusiness Technologies and
Information Exchange divisions. We determined that Inso's value would be most
enhanced by the eBusiness Technologies and Information Exchange divisions
pursuing their respective market opportunities, and by divestiture of the
Product Data Management division.
Recent Developments
On April 11, 2000, we announced that as part of our review of strategic
alternatives, which began in February 2000, Inso's Board of Directors determined
that the most appropriate means to enhance shareholder value is for Inso to
remain independent and to focus all of our energies on our DynaBase dynamic Web
publishing system. As a result, we will pursue the divestiture of our other
assets, including the Information Exchange division.
In line with this decision, we immediately began a corporate reorganization
designed to concentrate all our operations in our DynaBase business, which is a
part of our eBusiness Technologies ("eBT") division. Stephen O. Jaeger, who has
served as Inso Chief Executive Officer since March 1999, has resigned from that
position, but will continue in the role of Chairman of the Company's Board of
Directors. Kirby A. Mansfield, President, Chief Operating Officer and director,
has also resigned. James M. Ringrose, who was previously President of Inso's
eBusiness Technologies division, has become President and Chief Executive
Officer of Inso Corporation. Mr. Ringrose has led eBT since March 1999, and has
been responsible for the expansion of the eBT business over the last year.
As part of this management reorganization, we will close our headquarters
in Boston during May and will consolidate all corporate functions in Providence
at eBT's current offices. As a result, the majority of our Boston-based
corporate personnel, including Chief Financial Officer, Robert Dudley, will
leave Inso in May, with a small number of personnel relocating to Providence.
Upon Mr. Dudley's departure from Inso, Christopher M. Burns, currently Vice
President, Operations and Finance for eBT, will become Vice President, CFO and
Treasurer of Inso.
Inso's Board of Directors has determined that the Information Exchange
Division ("IED") should be separated from the DynaBase business. Accordingly,
Inso is seeking acquirers for IED, which will be operated separately pending
such a transaction.
eBusiness Technologies Products
Our eBusiness Technologies ("eBT") division develops and markets industry-
leading e-business solutions that are designed to control, automate and extend
all activities associated with Web content management and dynamic delivery
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and with digital media asset management. Our eBT division is comprised of our
DynaBase Dynamic Web Publishing System, our MediaBank Media Asset Management
system and related technologies. These technologies were formerly part of our
Electronic Publishing Solutions division (see "Product Data Management
Products"). Our eBT products and services are designed to deliver sophisticated
business-to-business and business-to-consumer applications via the Web and to
provide industry-leading digital media asset management solutions.
Our eBT division is a provider of solutions for building and sustaining
interactive, online business-to-business and business-to-consumer activities
with substantial expertise in XML. DynaBase/R/, the industry's first integrated
XML-based Web publishing solution, combines sophisticated content management
capabilities with a powerful dynamic serving environment. DynaBase automates the
production of content for, and enables personalized delivery of content to, the
Internet as well as intranet, extranet and wireless networks and devices.
On August 28, 1998, we acquired the MediaBank Media Asset Management system
and related technologies from Bitstream Inc. Our MediaBank product offers the
media asset management market a solution to help enable workgroup productivity,
workflow and object management for a wide range of pre-production media elements
including text, document images, movies, graphics, sounds and fonts.
We sell our eBT products through direct and reseller channels. Our ultimate
customers are corporate end users. Our direct selling efforts for DynaBase
focus on companies with large, complex, dynamic Web sites. In addition, through
indirect channels, including resellers, systems integrators, and alliances with
other firms, we sell or market our eBT products to a broad range of customers
and industries.
Research and Development
eBT operates in an industry that changes technology rapidly, and its
ability to compete and operate successfully depends on, among other factors, its
ability to anticipate such change. In addition, eBT relies upon the rapid
development of products that support standards such as XML to differentiate
itself from others. Accordingly, we are committed to the development of new
products, to the continuing evaluation of new technologies, and to participating
in standard setting, such as through our participation in the World Wide Web
Consortium. During fiscal year 2000, eBT made significant investments in
research and development in new products for use on or in conjunction with the
Internet and the Web, particularly improvements to our DynaBase Dynamic Web
Publishing System. The rapid changes that characterize these markets may
require that we make substantial additional investments in research and
development in order to respond to market or technological developments. We
expect to make significant investments in fiscal 2001 in our eBT products,
particularly DynaBase and related eBusiness applications.
Intellectual Property Rights
The eBT operating division registers patents, copyrights and trademarks to
certain of its products on an ongoing basis. However, we believe that, in
general, patents, copyrights, trademarks and similar intellectual property
rights are less important to the ability of the eBT operating division to
compete successfully in its markets than are the currency of the technology and
the know-how and ability of its development personnel. Certain of our eBT
technologies include database technology from third parties, which we license
pursuant to royalty-free licenses expiring in 2003.
Competition
The market for our eBT solutions is characterized by a number of
participants offering full or partial solutions, based on both proprietary
formats and open standards-based formats. Participants in this market include
Vignette Corporation, Interwoven, Inc., InterLeaf, Inc., BroadVision, Inc. and
Open Market, Inc. Many of these competitors have substantially greater
development, marketing, sales and financial resources than does Inso. As the
market for Web-based solutions continues to grow and consolidate, we expect to
face additional competition from both new entrants as well as existing companies
in the eCommerce market that are seeking to expand their product offerings.
We also face limited competition from specialized providers offering to develop
custom solutions. We believe that the principal competitive factors in this
market are product quality, scalability, functionality, XML expertise and
completeness of solution, with price being a secondary factor.
Information Exchange Products
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Our Information Exchange ("IED") division, through its industry-leading
Outside In technology, provides comprehensive information access solutions for
delivering business information in both connected and mobile computing
environments. IED products enable users to filter, view, copy, print and
distribute electronic information over LANs, WANs and the Web, regardless of
format or structure. These products permit users to access native documents
without the originating application, to convert information from one format to
another, and to publish information on demand to the Web directly from the
original document, without any conversion or transformation.
Our IED products include our file-viewing and conversion products and our
"on demand" Web publishing products. These products allow organizations to share
documents across networks, intranet and Internet environments and electronic
mail systems with different applications and operating system platforms. Our IED
products include our Quick View Plus/R/ enterprise viewing product, the Outside
In/R/ OEM Viewing Technology, the Outside In/R/ HTML Export OEM product and the
Outside In/R/ Server HTML on-demand conversion product. Quick View Plus provides
businesses and consumers with the ability to view, copy and print files
originating in more than 250 applications and in disparate operating system
environments. Outside In/R/ Server automatically creates customized web pages
from standard business documents. Our Outside In/R/ Viewing Technology and HTML
Export OEM products provide file viewing and Web delivery functionality to
software vendors and corporate software developers. During fiscal year 2000 we
created a Mobile & Wireless business group within IED, and began development of
the first version of Outside In OEM Viewing Technology than runs on the Symbian
(EPOC) platform, a leading platform for mobile and wireless handheld devices.
The IED products are marketed worldwide to original equipment manufacturers
("OEMs") of computer hardware, mobile and wireless devices, software, and
consumer electronics products as well as directly and indirectly to corporations
and government organizations. The IED operating division is served by an OEM
sales organization and by a direct sales force. The IED business also uses a
worldwide network of channel partners to reach the retail and low-volume market
segments.
On December 22, 1998, we acquired the outstanding stock of Venture Labs,
Inc., owner of Paradigm Development Corporation ("Paradigm"), a developer of
Java-based document conversion and viewing products. The Java filtering and
viewing technologies obtained from Paradigm have been integrated into the IED
operating division.
Research and Development
Since IED operates in an industry that changes technology rapidly and has
significant competition, continued product acceptance requires rapid response to
changing technology and market conditions. Product currency, particularly with
respect to new versions of popular desktop products, such as Microsoft Office,
is a requirement of both the OEM and direct markets served by the IED products.
In addition, the OEM portion of IED's market requires that IED products run on
new operating system platforms, such as Symbian, on a continuing basis.
Accordingly, we must continue to invest on an ongoing basis in rapid support for
new application formats in our products. During fiscal 2000, IED continued to
make significant investments in development related to the creation of a new
product architecture, which is designed to permit rapid response to new
requirements for application format and operating system support, and in
development of products for the mobile and wireless market. We expect to
continue to make significant investments in fiscal 2001 in these areas.
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Intellectual Property Rights
The IED operating division does not have patents on its technologies,
although we register copyrights and trademarks to certain of its products on an
ongoing basis. Due to the nature of its business, we believe that product
currency and timeliness of upgrades and platform support are more important to
our competitive position than are patents or other intellectual property rights.
Competition
Competition in the markets for IED products is significant. Our viewing and
conversion products and our on- demand Web publishing system compete with
offerings from Verity Inc. in the OEM market and from other proprietary file
viewing products. We believe that the principal competitive factors in the
direct corporate and government market are product quality, compatibility with
multiple applications and operating systems, and update frequency, with price
being a secondary factor. We believe that the principal competitive factors in
the OEM market for Information Exchange products are price, format and operating
system coverage, and ease of implementation.
Product Data Management Products
Until January 7, 2000, we operated a Product Data Management ("PDM")
division. The PDM division consisted of two principal sets of technologies: (1)
the product data management technologies we obtained in December 1998 through
our acquisition of all of the outstanding stock of Sherpa Systems Corporation,
and (2) our traditional stand-alone technical document publishing business. The
stand-alone technical document publishing business consisted of the following
products: (a) our DynaText/DynaWeb technical publishing tools, which were
previously part of our Electronic Publishing Systems division, (b) the Synex
ViewPort browser engine and related application development toolkits for the
viewing of SGML information, which we obtained on March 12, 1998, through our
acquisition of all the stock of ViewPort Development AB of Stockholm, Sweden,
and (c) Balise, an SGML and XML transformation tool and scripting language, and
Dual Prism, a Web-based XML and SGML publishing system, each of which we
acquired on January 12, 1999 through our acquisition of AIS Software S.A. of
Paris, France ("AIS Software") from Berger- Levrault S.A., a leading French
publisher.
During fiscal year 2000, we disposed of the PDM division in two separate
transactions. On October 29, 1999, we sold the DynaText/DynaWeb stand-alone
technical document publishing component of our PDM division, including the Synex
ViewPort browser engine and related application development toolkits, for
$14,750,000 to Enigma Information System Ltd. and its subsidiary, Enigma
Information USA, Inc., (collectively "Enigma"). The transaction was in the form
of a purchase by Enigma of all of the outstanding stock of our subsidiaries Inso
Providence Corporation and ViewPort Development AB.
On January 7, 2000, we sold the remainder of the PDM division for
$6,000,000 in cash plus assumption of liabilities (subject to adjustment based
on the net worth of the business at the closing) to Structural Dynamics Research
Corporation ("SDRC"). The transaction was in the form of a purchase by SDRC of
all of the outstanding stock of our subsidiaries Sherpa Systems Corporation and
Inso France Development SA (formerly AIS Software).
Our product data management products consisted of a line of products
designed to meet the needs of large manufacturers and other businesses that need
to efficiently and effectively manage product-related information and the
deployment of that information in product development, manufacturing, sales,
service, and other departments of their extended enterprises. These products
provided document management, change control, and workflow functionality, and
frequently were integrated with other software applications in the enterprise,
including Computer Aided Design ("CAD") tools and Manufacturing Resource
Planning/Enterprise Resource Planning (MRP/ERP) systems. Our technical
publishing products enabled traditional technical publishers to manage and
distribute electronic content from a wide variety of sources through the World
Wide Web, intranets, CD-ROM and print.
At the time of the acquisition in 1998 of Sherpa Systems Corporation, we
anticipated that Sherpa Systems Corporation's existing and planned product
offerings could be integrated with certain of Inso's other technologies into a
solution serving the electronic information needs of an entire enterprise. We
later determined that Inso's value would be most enhanced by the eBusiness
Technologies and Information Exchange divisions pursuing their respective market
opportunities, and by divestiture of the Product Data Management division.
5
Research and Development
The portion of our PDM division consisting of product data management
products operated an industry that is subject to considerable technological
evolution, and our ability to compete successfully in those markets required
that we be able to forecast and develop products in anticipation of such change,
and that these products adhere to open standards for communication and data
interchange with other applications. During fiscal year 2000, we focused our
research and development efforts primarily on improving the scalability and
reliability of the product data management products. We did not make
significant investments in our traditional stand-alone technical document
publishing products during fiscal year 2000.
Intellectual Property Rights
The PDM operating division registered patents, copyrights and trademarks on
an ongoing basis. Due to the nature of its business, we believe that the domain
expertise of its personnel and its knowledge of its customers' processes were
more important competitive factors than such intellectual property rights.
However, we believed that, in general, patents, copyrights, trademarks and
similar intellectual property rights were less important to the ability of the
PDM operating division to compete successfully in its markets than were the
currency of the technology and the know-how and ability of its development
personnel.
Competition
During the period in which we operated the PDM division, the primary
competition for our product data management technologies arose from products and
services offered by SDRC, Parametric Technology Corporation, and Matrix-One,
Inc. During that time, the principal competitors in the technical publishing
market were Quark, Inc., Softquad International, Inc., Enigma and an affiliate
of Open Market, Inc. We believe that the primary competitive factors in PDM's
markets were scalability, product quality, configurability, implementation cost,
implementation support, support for multiple product design environments, and
completeness of solution, with price being a secondary factor.
Lexical and Linguistic Products
Until April 23, 1998, we operated a division that sold Lexical and
Linguistic products. On April 23, 1998, we sold those assets, including the
proofing tools, reference works, and information management tools products as
well as all customer and supplier agreements related to the products to Lernout
& Hauspie Speech Products, NV ("Lernout & Hauspie"). Lernout & Hauspie
specializes in the development of linguistic tools for various purposes,
including voice recognition and processing.
The products of the Lexical and Linguistic operating division included
International CorrectSpell/TM/, a spelling correction system; CorrectText/R/.
Grammar Correction System, an English grammar correction technology used in word
processors; International ProofReader/TM/, a multilingual proofreading system
available in 10 languages; and the IntelliScope/R/ family of linguistic search
and retrieval tools. Included in the disposition was Level 5 Research, Inc.,
maker of the Quest database search product, which had been incorporated into the
Lexical and Linguistic operating division.
Lexical and Linguistic products were sold almost exclusively on a direct
basis to OEMs to embed in common desktop applications and consumer electronic
devices. Prior to the disposition of the Lexical and Linguistic operating
division, our OEM sales force sold both Information Exchange (formerly Dynamic
Document Exchange) and Lexical and Linguistic products.
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Research and Development
We operated the Lexical and Linguistic operating division in two parts of
the software industry: the mature proofing tools and reference works markets
that were not as susceptible to rapid technological change as other parts of the
industry, and the rapidly changing and evolving linguistic search market.
Product development issues in the proofing tools and reference works markets
were focused on platform support and currency with European language changes. In
the linguistic search market, product development issues were predominantly
associated with improving accuracy and speed of retrieval against increasingly
large data collections. Overall, the level of development expenditure required
for Lexical and Linguistic products was lower than that in our current operating
divisions. During the period of our ownership in 1998, we did not make
significant investments in new technology initiatives for the Lexical and
Linguistic products.
Intellectual Property Rights
The Lexical and Linguistic operating division obtained, prior to its
disposition, a number of patents on its proofing tools and search technologies,
and registered copyrights to its products on a regular basis. However, it was
our experience that continued improvement of lexical information and ease of
implementation were more important to our competitive position than were
patents, copyrights, and similar intellectual property rights. The Lexical and
Linguistic operating division licensed significant lexical and linguistic
content from third party suppliers, and these license agreements were very
important to maintaining its competitive position. It was our experience that
there were sufficient potential suppliers of such content, alternative sources
were generally available, and that the Lexical and Linguistic operating division
was not reliant on any particular vendor.
Competition
During the period of our ownership of the Lexical and Linguistic operating
division, the most significant competition came from the internal development
capabilities of large OEM customers, such as Microsoft Corporation. We believe
that the principal competitive factors in the markets for our Lexical and
Linguistic products were price, product quality, ease of implementation,
language coverage, and platform support.
Research and Development
During fiscal years 2000, 1998 and 1997, our expenditures for developing
new products and product enhancements were $29,825,000, $24,435,000 and
$28,449,000, respectively. These expenditures represented 46%, 41% and 35%,
respectively, of total revenues for those periods. Of these amounts,
$3,746,000, $4,906,000 and $6,355,000, respectively, were capitalized in
accordance with applicable accounting principles and are subject to amortization
over subsequent periods. The balance was charged as product development expense.
International Operations
Our international operations primarily support direct and indirect
distribution of products to corporate and governmental customers. In
connection with the disposition of the PDM business, and with our restructuring
actions in fiscal 2000, we decreased the direct marketing of our products to
customers outside the United States. The marketing of products to customers
outside the United States increases the risk to our revenues associated with
fluctuations of the U.S. dollar in relation to foreign currencies. Such
fluctuations could also result in increased operating expenses associated with
foreign operations. See Item 7A. Quantitative and Qualitative Disclosures About
Market Risk for additional disclosures about foreign currency risk, and Note 15
to the "Notes to Consolidated Financial Statements" for additional information
regarding foreign sales.
Marketing, Sales, and Distribution
Prior to fiscal year 2000, our sales and marketing organization was
centrally managed from our headquarters in Boston, Massachusetts. Early in
fiscal year 2000, we reorganized the Company into a true divisional structure,
with each operating division maintaining its own sales and marketing operations.
Each operating unit's sales efforts are conducted through product-specific sales
forces.
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During fiscal year 2000, in connection with the disposition of the PDM
business and with our restructuring actions, we closed many of our international
offices, including our offices in Japan, Canada and Australia. We currently have
international sales offices in the United Kingdom, France and Germany. These
operations manage sales of our products to end-users directly and through
networks of value-added resellers and distributors, as well as to OEMs.
Approximately 33% of our revenues during fiscal year 2000 originated with
customers outside the United States.
Employees
As of January 31, 2000, we had 332 employees, including 149 in research and
development, 130 in sales and marketing, and 53 in financial and administrative
positions.
We believe that our future success will depend in large part upon our
continued ability to recruit and retain highly qualified technical, managerial,
and marketing personnel. To date, we have been successful in attracting and
retaining skilled employees. None of our employees is represented by a labor
union, and we consider our relationship with our employees to be satisfactory.
Item 2. Property
Our corporate headquarters is located in Boston, Massachusetts, where we
currently lease approximately 42,500 square feet of space. This lease term was
scheduled to expire on November 30, 2005. On March 3, 2000, we reached an
agreement with our Boston landlord, which terminated our existing lease and
provided for a new lease of smaller quarters, comprising 10,741 square feet of
space, within the same office building. The new lease is effective May 1, 2000,
and the lease term expires in May 2005. The IED business leases approximately
28,230 square feet of space in downtown Chicago, Illinois, with a lease term
expiring September 2006. The eBT division leases approximately 44,300 square
feet of space in Providence, Rhode Island. This lease has a term expiring in
January 2007, and includes options on contiguous space at a fixed rate as well
as extension provisions. The IED division formerly leased approximately 15,223
square feet of space in Vancouver, British Columbia, and approximately 5,500
square feet in Kansas City but those leases were terminated in fiscal 2000 in
connection with our restructuring actions. We lease an aggregate of
approximately 10,695 square feet of office space in Scottsdale, Arizona for the
IED division and in Portland, Oregon for the eBT division. In addition, we
lease, through our various subsidiaries, office space in the United States and
overseas for marketing and sales activities. We do not own any real property.
We believe that the space currently under lease to us is adequate for our
current needs and that suitable additional or substitute space will be available
as needed to accommodate further physical expansion of our operations and for
additional sales offices.
Item 3. Legal Proceedings
During February 1999, certain shareholders of Inso filed seven putative
class action lawsuits against Inso and certain of Inso's officers and employees
in the United States District Court for the District of Massachusetts. The
lawsuits were captioned as follows: Michael Abramsky v. Inso Corporation, et
al., Civ. Action No. 99-10193; Richard B. Dannenberg v. Inso Corporation, et
al., Civ. Action No. 99-10195; Jack Smith v. Inso Corporation et al., Civ.
Action No. 99-10208; Chavy Weisz v. Inso Corporation, et al., Civ. Action No.
99-10200; Robert C. Krauser v. Inso Corporation, et al., Civ. Action No. 99-
10366; Jean-Marie Larcheveque v. Inso Corporation, et al., Civ. Action No. 99-
10299; and Thomas C. McGrath v. Inso Corporation, et al., Civ. Action No. 99-
10389. These lawsuits were filed following our announcement on February 1, 1999
that we planned to restate our revenues for the first three quarters of 1998.
Each of the complaints asserted claims for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission, as well as a claim for violation of Section 20(a) of the Exchange
Act. On April 5, 1999, the seven class action lawsuits that were filed against
us were consolidated into one lawsuit entitled In Re Inso Corporation, Civil
Action No. 99-10193-WGY.
The plaintiffs allege that the defendants prepared and issued deceptive and
materially false and misleading statements to the investing public. They seek
unspecified damages. We believe the claims are subject to meritorious
defenses, which we plan to assert during the lawsuit. On September 29, 1999, we
entered into an insurance agreement with a major AAA-rated insurance carrier
pursuant to which the insurance carrier assumed complete financial responsibly
for the defense and ultimate resolution of the lawsuit. A net charge to our
fiscal year 2000 consolidated results of
8
$13,451,000 was taken in connection with the insurance agreement.
As soon as we discovered that it could be necessary to restate certain of
our financial results for the first three quarters of 1998, we immediately and
voluntarily provided this information to the U.S. Securities and Exchange
Commission. On June 2, 1999, we were informed that the U.S. Securities and
Exchange Commission had issued a Formal Order of Private Investigation in
connection with matters relating to Inso's previously announced restatement of
its 1998 financial results. We cannot predict the ultimate resolution of this
action at this time, and there can be no assurance that the Formal Order of
Private Investigation will not have a material adverse impact on our financial
condition and results of operations.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and
Microlytics Technology Co., Inc. (together "Microlytics") filed a complaint
against Inso in the United States Bankruptcy Court for the Western District of
New York. The lawsuit is captioned Microlytics, Inc. and Microlytics Technology
Co., Inc. v. Inso Corporation, Adversary Proceeding No. 99-2177. The complaint
seeks turnover of purported property of the estates and damages for Inso's
alleged breaches of a license from Microlytics relating to certain computer
software databases and other information. The complaint seeks damages of at
least $11,750,000. On August 19, 1999, we filed our Answer and Demand for Jury
Trial. Also, on August 19, 1999, we filed a motion to withdraw the case from
the Bankruptcy Court to the United States District Court for the Western
District of New York. On December 15, 1999, the United States District Court
granted our motion for the purposes of dispositive motions and trial. We
believe that the claims are subject to meritorious defenses, which we plan to
assert during the lawsuit. We cannot predict the ultimate resolution of this
action at this time, and there can be no assurance that the litigation will not
have a material adverse impact on our financial condition and results of
operations.
During February 2000, certain shareholders of Inso filed two putative class
action lawsuits against Inso and certain of Inso's officers and employees in the
United States District Court for the District of Massachusetts. The lawsuits
are captioned as follows: Liz Lindawati, et al. v. Inso Corp., et al., Civil
Action No. 00-CV-10305GAO; Group One Limited, et al. v. Inso Corp., et al.,
Civil Action No. 00-CV-10318GAO. These lawsuits were filed following our
preliminary disclosure of revenues for the fiscal year 2000 fourth quarter on
February 1, 2000. Both complaints assert claims for violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission, as well as a claim for violation of Section 20(a) of the
Exchange Act. The plaintiffs allege that the defendants prepared and issued
deceptive and materially false and misleading statements to the investing
public. They seek unspecified damages. We believe that the claims are subject
to meritorious defenses, which we plan to assert during the lawsuit. We cannot
predict the ultimate resolution of these actions at this time, and there can be
no assurance that the litigation will not have a material adverse impact on our
financial condition and results of operations.
We are also subject to various legal proceedings and claims that arise in
the ordinary course of business. We currently believe that resolving these
matters will not have a material adverse impact on our financial condition or
our results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Executive Officers of the Registrant
James M. Ringrose, who is 47 years old, has been President and Chief
Executive Officer of Inso since April 2000. He was President of eBT from May
1999 to April 2000, and was Vice President of Inso Corporation from March 1998
to April 2000. Mr. Ringrose was Vice President of Marketing for the Company from
March 1998 to May 1999. Prior to joining Inso, Mr. Ringrose was Director of the
IBM/Lotus accounts for Lois Paul and Partners, a strategic communications firm.
Prior to that time, Mr. Ringrose served in various senior roles at Banyan
Systems of Westborough MA from 1989 until 1995, including Vice President of
European Marketing and Director of Corporate Communications.
Scott D. Norder, who is 34 years old, has been President of IED since May
1999, and has been Vice President of Inso Corporation since January 1997.
Mr. Norder became Vice President and General Manager of Inso Chicago in June
1995. Mr. Norder was Vice President of Engineering for Systems Compatibility
Corporation, now Inso Chicago, from April 1991 to June 1995. Prior to that time
Mr. Norder held key leadership positions within the development organization of
Systems Compatibility Corporation since 1987.
Robert F. Dudley, who is 47 years old, has been Vice President, Chief
Financial Officer and Treasurer since August 2, 1999. Prior to joining Inso,
Mr. Dudley was employed for 15 years by Data General Corporation, most recently
as Senior Director, Strategic Planning and Business Operations for a worldwide
business division, and prior to that as Division Controller, Director of
Corporate Profit Planning and Budget Manager.
Bruce G. Hill, who is 36 years old, was Vice President, General Counsel,
and Secretary of Inso from March 1994 until February 1999 and has been Vice
President of Business Development since July 1997. Prior to joining Inso,
Mr. Hill had been an associate attorney specializing in corporate and mergers
and acquisitions matters at the law firm of Skadden, Arps, Slate, Meagher & Flom
in Boston, Massachusetts, from 1988 until March 1994.
Jonathan P. Levitt, who is 35 years old, has been Vice President and
General Counsel of the Company since September 1999, and has been Secretary of
the Company since March 1999. Mr. Levitt was Chief Legal Officer of the Company
from March 1999 to September 1999, and was Intellectual Property Counsel of the
Company from July 1997 to March 1999. Prior to joining Inso, Mr. Levitt was an
associate attorney at the Boston law firm of Lucash, Gesmer & Updegrove LLP from
September 1994 to July 1997 specializing in computer and intellectual property
law. Mr. Levitt was an associate attorney in the business law section of the
Boston law firm of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. from
October 1992 to September 1994.
Elaine S. Ouellette, who is 42 years old, has been Vice President, Human
Resources of the Company since November 1996. Prior to joining the Company,
Ms. Ouellette was Director of the Human Resource Services Division at
International Data Group, Inc, (IDG) where she worked from October of 1988 until
November of 1996. Prior to joining IDG, Ms. Ouellette held various positions in
Human Resources at Data General Corporation beginning in 1983. Ms. Ouellette
started her career as an associate in executive search and marketing consulting
firms.
Christopher M. Burns, who is 35 years old, will become Vice President,
Chief Financial Officer and Treasurer of Inso Corporation upon the effectiveness
of Mr. Dudley's resignation from those positions in May, 2000. From April, 1999
through April, 2000, Mr. Burns was Vice President of Operations of Inso's
eBusiness Technologies (eBT) division. From July, 1996 through April, 1999,
Mr. Burns was Divisional Controller of Inso Providence Corporation. Prior to
joining Inso, Mr. Burns held various senior finance and accounting positions
with Electronic Book Technologies, Inc., most recently as controller.
10
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of Inso trades on the Nasdaq National Market of The Nasdaq
Stock Market under the symbol "INSO." The following table sets forth the high
and low sale prices of Inso's common stock for the fiscal periods listed below
as reported on the Nasdaq National Market. Such information reflects
interdealer prices, without retail markup, markdown, or commission, and may not
represent actual transactions.
Fiscal 2000 Fiscal 1999 (1 month)
----------- ---------------------
Quarter Ended High Low High Low
- -------------- ---- --- ---- ---
April 30..................................................................... $10.00 $ 5.56 N/A N/A
July 31...................................................................... 7.75 4.69 N/A N/A
October 31................................................................... 14.88 4.63 N/A N/A
January 31................................................................... 42.00 13.25 $27.88 $23.75
1998
----
Quarter Ended High Low
- ------------- ---- ---
March 31.......................................................................................... $19.25 $11.13
June 30........................................................................................... 21.63 10.63
September 30...................................................................................... 22.25 13.63
December 31....................................................................................... 29.00 15.25
As of April 13, 2000, Inso's common stock was held by 395 holders of
record. Inso has paid no dividends on its common stock since its formation and
has no current plans to do so.
11
Item 6. Selected Financial Data
Statement of Operations Data
One Month
---------
Year Ended Ended
---------- -----
January 31, January 31, Years Ended December 31,
----------- ----------- ------------------------
(In thousands except per share amounts) 2000 1999 1998(1) 1997(1) 1996(1) 1995(1)
- --------------------------------------- ---- ---- ------- ------- -------- -------
Net revenues................................ $ 64,680 $ 3,108 $ 60,094 $81,869 $ 70,534 $43,387
Gross profit (loss)......................... 42,470 (239) 47,444 72,058 61,362 37,595
Restructuring (loss) expenses (4)........... 11,068 - - 5,848 - -
Special charges (4)......................... 28,103 - - - - -
Purchased in-process research and
development................................ - 500 21,900 6,100 38,700 5,500
Total operating expenses (3)................ 115,584 8,805 86,019 73,930 75,439 26,017
Operating (loss) income..................... (73,114) (9,044) (38,575) (1,872) (14,077) 11,578
Gain on sale assets, net (2)................ 12,212 - 13,289 - - -
(Loss) income before provision for income
taxes...................................... (61,836) (8,691) (20,604) 2,504 (11,073) 13,046
Provision for income taxes.................. 474 - (1,035) 2,944 10,207 7,052
Net (loss) income (2,3)..................... (62,310) (8,691) (19,569) (440) (21,280) 5,994
(Loss) earnings per common share............ $ (3.98) $ (0.56) $ (1.30) $ (0.03) $ (1.61) $ .49
(Loss) earnings per common share-assuming
dilution................................... $ (3.98) $ (0.56) $ (1.30) $ (0.03) $ (1.61) $ .49
Balance Sheet Data
As of January 31, As of December 31,
-----------------
(In thousands) 2000 1998 1997 1996 1995
- -------------- ---- ---- ---- ---- ----
Working capital..................................... $35,456 $ 42,277 $ 85,558 $ 84,261 $55,460
Deferred income tax benefit, net.................... - - 5,917 4,930 3,847
Total assets........................................ 80,589 163,219 138,083 136,272 91,129
Long-term debt...................................... 142 450 - - -
Stockholders' equity................................ 55,372 109,174 115,478 113,413 75,163
(1) Inso's 1995 results include the operations of Systems Compatibility
Corporation since its acquisition on April 1, 1995. Inso's 1996 results
include the operations of Electronic Book Technologies, Inc. and ImageMark
Software Labs since their acquisition dates of July 16, 1996 and January 9,
1996, respectively. Inso's 1997 results include the operations of
Mastersoft, Inc., Level Five Research, Inc., and Henderson Software, Inc.
since their acquisition dates of February 6, 1997, April 22, 1997, and
November 24, 1997, respectively. Level Five Research, Inc. was
subsequently sold on April 23, 1998. Inso's 1998 results include the
operations of ViewPort Development AB, MediaBank, Sherpa Systems
Corporation, and Venture Labs, Inc. since their acquisitions dates of March
12, 1998, August 28, 1998, December 4, 1998 and December 22, 1998,
respectively. (See Notes 4 and 5 of "Notes to Consolidated Financial
Statements".)
(2) Inso's 1998 results include a gain of $13,289,000 on the sale of Inso's
linguistic software net assets to Lernout & Hauspie Speech Products N.V. on
April 23, 1998. Inso's fiscal 2000 results include a gain of $14,549,000 on
the sale of its Dynatext/DynaWeb stand-alone technical publishing products
and its ViewPort browser technology, and a loss of $2,337,000 on the sale
of the balance of its PDM Division (See Note 5 of "Notes to Consolidated
Financial Statements").
(3) Inso's 1998 results include a charge of $4,000,000 relating to an
international distributor relationship (See Note 14 of "Notes to
Consolidated Financial Statements"). Inso's fiscal 2000 results include a
credit of $3,093,000, relating to a release from the 1998 agreement with
the international distributor.
(4) Inso's restructuring charges of $11,068,000 and 5,848,000 in fiscal 2000
and 1997 and the special charge of $28,103,000 in fiscal 2000 are described
in Notes 6 and 7 of "Notes to Consolidated Financial Statements".
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
We derive our revenues primarily from one-time and annual licenses with
corporate, government, and OEM customers and channel-partners; software
maintenance fees from site-license agreements with corporate and government
customers; one-time fees for direct licenses to consumers; royalties, including
initial nonrefundable royalties, from license arrangements with channel-partners
and OEMs; and professional service fees for services provided to licensees of
our other products. Revenues from site-license agreements generally consist of
a one-time license fee based on the number of individual users or servers
licensed or to the extent of use of the software by the end user. For each site
license agreement, an annual software maintenance fee is calculated based upon a
percentage of the applicable license fee. Payment of the maintenance fee
permits customers to receive updates and enhancements to the software licensed
for the duration of the maintenance agreement. Royalty revenues are earned in
one of the following ways: as a percentage of net revenues from product unit
sales by licensees that incorporate our products, as a fixed per-unit royalty,
or as a regular periodic fee based on estimated shipments or usage over time.
Professional service fees may include fees for training, installation,
consulting, implementation support, software design and/or development, and
customization or modification of licensed software. Service fees are charged
based on time and materials or on a fixed fee basis, and are recognized when the
service has been provided.
We generate a significant portion of our revenue from customers outside the
United States. Such revenues totaled 33%, 24% and 21% of total net revenue for
the years ended January 31, 2000 and December 31, 1998 and 1997, respectively.
We expect that the international market will continue to account for a
significant portion of our total business. Our export revenues are transacted
primarily in U.S. dollars. Therefore, we believe that we are not exposed to
significant risk with respect to changing currency exchange rates in connection
with our business with international customers. We generally denominate the
prices for our corporate and end-user products sold internationally in U.S.
dollars. Business with overseas end-users may be subject to greater currency
exchange rate risk in the future. (See "Certain Factors that May Affect Future
Operating Results.")
Cost of revenues primarily comprises the amortization of capitalized
product development costs and certain assets from acquisitions and license
agreements described in Note 4 of the "Notes to Consolidated Financial
Statements"; royalty expense for the licensing of technology; fulfillment; and
service and support costs. The level of amortization expense of capitalized
product development costs is directly related to the amount of product
development costs capitalized in each year and the time frame in which a
specific product is made available for general release to customers.
The following table sets forth, for the periods indicated, certain income
statement data expressed as a percentage of revenues.
13
Percentage of Revenues
Year Ended Month Ended
January 31, January 31 Years Ended December 31
----------- ---------- -----------------------
2000 1999 1998 1997
---- ---- ---- ----
Net revenues................................................ 100% 100% 100% 100%
Cost of revenues............................................ 34 108 21 12
Gross profit............................................... 66 (8) 79 88
Operating expenses:
Sales and marketing........................................ 38 88 46 29
Product development........................................ 40 81 33 27
Amortization of intangible assets.......................... 7 10 3 2
General and administrative................................. 33 88 26 18
Restructuring expenses..................................... 17 - - 7
Special charges............................................ 44 - - -
Purchased in-process research and development.............. - 16 36 7
Total operating expenses.................................... 179 283 144 90
Operating loss.............................................. (113) (291) (65) (2)
Net investment income...................................... 3 11 8 5
Write-down of investment in Information Please LLC......... (4) - - -
Gain on sale of assets..................................... 19 - 22 -
(Loss) income before provision for income taxes............. (95) (280) (35) 3
(Benefit) provision for income taxes........................ 1 - (2) 4
Net loss.................................................... (96) (280) (33) (1)
Year Ended January 31, 2000 Compared to Year Ended December 31, 1998
Revenues for the year ended January 31, 2000 increased $4,586,000, or 8%,
to $64,680,000 compared to $60,094,000 for the year ended December 31, 1998.
Total revenues for the year ended January 31, 2000 included $26,096,000 in
revenues from our Product Data Management ("PDM") division, which we sold in
January, 2000. Total revenues for the year ended December 31, 1998 included
revenues of $6,975,000 from our former Lexical and Linguistic operating
division, which was sold to Lernout & Hauspie Speech Products N.V. ("Lernout &
Hauspie") in April 1998. Excluding the Lexical and Linguistic operating
division in 1998 and the PDM division in both years, revenues from our ongoing
operations were $38,584,000 for the year ended January 31, 2000, compared to the
1998 revenues of $38,568,000.
Revenues from the eBusiness Technologies ("eBT") division increased 24%
from $9,935,000 in the year ended December 31, 1998 to $12,329,000 in the year
ended January 31, 2000. The increase was due primarily to increased sales of the
DynaBase product, which was introduced in late 1997. We expect to make
continued significant investments in fiscal 2001 in our eBT products,
particularly DynaBase and related eBusiness applications.
Revenues from the Information Exchange ("IED") division decreased by
approximately 8% from $28,633,000 in the year ended December 31, 1998 to
$26,255,000 in the year ended January 31, 2000. The decline in revenues in the
IED division is primarily attributable to lower revenues from the sales of Quick
View Plus to corporate customers.
Gross profit decreased $4,974,000, or 10%, from $47,444,000 for the year
ended December 31, 1998 to $42,470,000 for the year ended January 31, 2000.
Excluding the gross profit associated with the assets sold to Lernout & Hauspie
and the divested PDM division, gross profit decreased $3,475,000, or 11%, from
$32,794,000 for the year ended December 31, 1998 to $29,319,000 for the year
ended January 31, 2000. The decrease was due primarily to higher amortization
expense for capitalized software and acquired license technology associated with
the MediaBank product. As the eBT division added professional services
personnel, the cost of service revenues increased at a faster rate than the
associated revenues, also contributing to the decline. Gross profit as a
percentage of revenues, excluding the revenues
14
and gross profit associated with the assets sold to Lernout & Hauspie and the
divested PDM division, was 76% for the year ended January 31, 2000, compared to
85% for the year ended December 31, 1998.
Total operating expenses increased $29,565,000 to $115,584,000 for the year
ended January 31, 2000 from $86,019,000 for the year ended December 31, 1998.
Included in total operating expenses for the year ended January 31, 2000 were
special charges of $28,103,000 and restructuring expenses of $11,068,000. The
special charges include expenses for costs relating to the restatement of our
1998 financial results and the associated SEC investigation; costs relating to
the write-down of intangible assets and capitalized software costs,
substantially all attributable to the PDM division and net premium costs and
related expenses for a major insurance carrier to assume financial risk
associated with the class action litigation initiated against us in February
1999 (see Notes 7 and 14 to the "Notes to Consolidated Financial Statements").
Restructuring expenses included costs relating to the April and July 1999
charges in connection with the implementation of our new divisional structure
(see Note 15 to the "Notes to Consolidated Financial Statements") and our
October 1999 restructuring of the PDM division. Additionally, the operating
expenses for the year ended January 31, 2000 were reduced by a credit of
$3,093,000 to sales and marketing expenses for the termination of a 1998
international distributor agreement, for which an accrual of $4,000,000 was
recorded in the prior year. Included in total operating expenses for the year
ended December 31, 1998 were acquisition charges of $21,900,000 for certain
purchased technology under research and development by Venture Labs, Inc.,
Sherpa Systems Corporation, MediaBank and ViewPort Development AB, $2,596,000 in
operating expenses associated with our former Lexical and Linguistic operating
division, which was sold to Lernout & Hauspie, and the charge of $4,000,000
related to the same international distributor agreement under which a credit was
taken in fiscal 2000. Excluding the aforementioned charges and credit,
operating expenses increased $21,983,000 to $79,506,000 for the year ended
January 31, 2000 from $57,523,000 for the year ended December 31, 1998.
Acquisitions made in late 1998, primarily in the PDM division, contributed
approximately $25,000,000 to this increase, net of cost savings achieved through
our restructurings. Additional investments of approximately $5,000,000 in the
eBT division added to the increase. These increases were partially offset by
$8,000,000 in savings from the July 1999 restructuring of our ongoing
operations.
Sales and marketing expenses consist primarily of salaries, commissions,
and bonuses for sales and marketing personnel and promotional expenses. Sales
and marketing expenses decreased $2,904,000 to $24,559,000 for the year ended
January 31, 2000, from $27,463,000 for the year ended December 31, 1998. Sales
and marketing expenses for the year ended January 31, 2000 included a credit of
$3,093,000 for the termination of a 1998 international distributor agreement,
while the 1998 sales and marketing expenses included a charge of $4,000,000
related to this same distributor. Excluding the fiscal 2000 credit and the 1998
charge noted above and $461,000 in 1998 expenses associated with the assets sold
to Lernout & Hauspie, sales and marketing expenses increased $4,650,000 to
$27,652,000 for the year ended January 31, 2000, compared to $23,002,000 for the
year ended December 31, 1998. The increase was primarily due to acquisitions
made in 1998. Savings from the July 1999 restructuring of ongoing operations
offset increased spending in the eBT division relating to additional sales
resources and marketing programs.
Product development costs consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Product development expenses increased $6,550,000 to $26,079,000 for
the year ended January 31, 2000 from $19,529,000 for the year ended December 31,
1998. Excluding $1,572,000 in expenses associated with the assets sold to
Lernout & Hauspie, product development expenses increased by $8,122,000 for the
year ended January 31, 2000 compared to the year ended December 31, 1998. The
increase was due to acquisitions made in 1998, in particular Sherpa Systems
Corporation and MediaBank, combined with continued investment in DynaBase. This
increase was partially offset by savings resulting from the second quarter
restructuring.
Amortization of intangible assets increased $2,707,000 to $4,248,000 for
the year ended January 31, 2000 from $1,541,000 for the year ended December 31,
1998 due to the 1998 acquisitions.
General and administrative expenses increased $5,941,000 to $21,527,000 for
the year ended January 31, 2000 compared to $15,586,000 for the year ended
December 31, 1998. Excluding $530,000 in administrative expenses associated with
the assets sold to Lernout & Hauspie, general and administrative expenses
increased $6,471,000 for the year ended January 31, 2000 compared to the year
ended December 31, 1998. The increase in general and administrative expenses was
primarily due to additional costs for facilities, insurance and personnel due to
the acquisitions made in 1998.
15
The Company incurred approximately $500,000 in the first quarter of fiscal
2000 relating to the closure of the Company's Kansas City location, primarily
for severance for 11 terminated employees.
In July 1999, we adopted a plan of restructuring aimed at reducing current
operating costs, as well as supporting our new divisional structure. The
restructuring plan included a reduction of more than 20% from staff levels at
the end of fiscal year 1998, or 105 employees, including 10 executive or
management level employees. The plan also included the closure and/or
combination of domestic and international sales and administrative facilities
and the abandonment of leasehold improvements and support assets associated with
these locations. The plan also called for a change in focus away from certain
products. As a result of the restructuring plan, we recorded an initial charge
of $6,234,000, to the fiscal 2000 results. The charge included approximately
$2,184,000 of severance for employees in administrative, sales and development
positions; $957,000 for the closure and/or combination of domestic and
international sales and administrative facilities; $1,739,000 for write-down of
capitalized product development costs and intangibles for certain discontinued
products; and $1,354,000 for the write-off of leasehold improvements and support
assets associated with closed locations. The capitalized product development
costs and intangibles were written-down to their estimated future discounted
cash flows. Subsequent to the initial recording, net adjustments totaling
$156,000 were recorded, increasing the charge to $6,390,000. The adjustments
related to severance costs and closure of facilities. As of January 31, 2000,
accrued liabilities of approximately $406,000 remained relating to this
restructuring charge. The remaining accrual amount is expected to be paid by
July 31, 2000 (see Note 6 to the "Notes to Consolidated Financial Statements").
Savings from this plan was approximately $10,000,000 in the fiscal year ended
January 31, 2000 and is expected to be $17,000,000 annually.
In October 1999, we adopted a plan of restructuring aimed at reducing
current operating costs in our PDM division. The restructuring plan included a
PDM workforce reduction of approximately 40%, or 51 employees, including 9
executive or manager level employees. The plan also included the consolidation
of the PDM division's sales, service and support organizations, the
consolidation of PDM development facilities and the abandonment of leasehold
improvements and support assets associated with these locations. The plan also
called for a change in focus away from certain development activities.
Therefore, the charge included a write-down of licensed technology for
discontinued development activities to their fair values, based upon their
estimated future cash flows. As a result of the restructuring plan, we recorded
an initial charge of $4,290,000 to the fiscal 2000 results. The charge included
approximately $1,030,000 of severance for employees in administrative, sales and
development positions; $690,000 for the consolidation of sales, service and
support organizations and development facilities; $1,923,000 for the write-down
of licensed technology for discontinued development activities; and $647,000 for
the write-off of leasehold improvements and support assets associated with
closed locations. Subsequent to the initial recording, net adjustments totaling
$92,000 were recorded, reducing the charge to $4,198,000. The adjustments
related to severance costs and closure of facilities, as well as revisions to
the write-off of the support assets. As of January 31, 2000, accrued liabilities
of approximately $630,000 remained relating to this restructuring charge. The
remaining accrual amount is expected to be paid by July 31, 2000 (see Note 6 to
the "Notes to Consolidated Financial Statements").
For the year ended January 31, 2000, the Company incurred $28,103,000 of
special charges. Included in the special charges were $1,527,000 in
professional fees incurred in connection with the restatement of the Company's
results for the first nine months of 1998. These professional fees were for the
Company's investigation of the circumstances surrounding certain transactions
leading to the restatement and for the formal investigation initiated by the
Securities and Exchange Commission following the restatement. Also related to
the restatement were $13,451,000 of net premium costs and related professional
advisory fees for a major insurance carrier to assume financial risk associated
with the class action litigation initiated against the Company in February 1999,
as well as $2,320,000 of severance costs for certain employees who were
terminated or resigned. Additionally, approximately $10,805,000 of the special
charges related to the write-down of intangible assets and capitalized software
costs, substantially all attributable to the Company's PDM division, to their
estimated fair values, determined based upon estimated future cash flows. In
connection with the Company's restructure and subsequent plan to divest of the
PDM division, the intangible assets recorded at the time of acquisition were
reevaluated. In connection with the future plans and the anticipated future
cash flows of the business, the intangible assets were written down to their net
realizable values, as determined from estimated proceeds to be received upon a
sale of the business.
On January 5, 2000, we sold the remaining interest in our PDM Division for
$6,000,000 in cash plus assumption of liabilities, subject to adjustment based
on the net worth of the business at the closing. The sale transaction was in
the form of a stock purchase by Structural Dynamics Research Corporation
("SDRC") of all of the outstanding stock of our
16
subsidiaries Sherpa Systems Corporation and Inso France Development S.A. We
received proceeds on this sale of $5,000,000 in cash at the time of the closing,
and $1,000,000 was placed in a supplemental closing fund to be paid no later
than 90 days after the first anniversary of the closing date. The net worth of
the business, as calculated on the closing balance sheet, is expected to result
in an additional payment from SDRC of approximately $4,000,000, which we
anticipate receiving in the first half of fiscal 2001. The sale to SDRC along
with the sale in October 1999 of the DynaText/DynaWeb and ViewPort browser
technologies to Enigma completed the disposition of our PDM segment.
On October 29, 1999, we sold our DynaText/DynaWeb stand-alone technical
document publishing component of our PDM Division, along with our ViewPort
browser technology assets, for $14,750,000. The transaction was in the form of
a stock purchase. We received proceeds on this sale of $9,000,000 in cash and
$5,750,000 in the form of a promissory note, due and payable by April 30, 2000.
We received payment of $4,500,000 on the promissory note in January, 2000. The
final payment of the note is subject to final closing adjustments. The balance
due has been deposited into an interest bearing escrow account, pending
determination of the final closing adjustments. The total of any adjustments is
not expected to be material, and we believe that the escrow fund will be
distributed in the first half of fiscal 2001.
As a result of the net operating losses incurred in fiscal 2000, and after
evaluating the Company's anticipated performance over its normal planning
horizon, we have provided a full valuation allowance for our net operating loss
carryforwards and other net deferred tax assets. The 1998 reported tax benefit
was the result of net operating loss carrybacks available from taxes paid in
prior years. In 1998, the net operating loss carryforwards and other deferred
tax assets in excess of deferred tax liabilities were also fully reserved
through a valuation allowance.
Excluding the restructuring expenses of $11,068,000, or $0.71 per share,
the special charges of $28,103,000 or $1.79 per share, the sales and marketing
credit of $3,093,000, or $0.20 per share for the termination of a 1998
international distributor agreement, the gain on sale of the Company's
DynaText/DynaWeb stand-alone technical document products of $14,549,000, or
$0.93 per share, the write-down of the Company's investment in Information
Please LLC of $2,655,000, or $0.17 per share, and the loss on the sale of the
PDM Division of $2,337,000, or $0.15 per share, net loss and net loss per share
for the year ended January 31, 2000 would have been $35,789,000, or $2.28 per
share, respectively. Excluding the gain on the sale of the linguistic software
net assets of $13,289,000, or $0.88 per share, the sales and marketing charge of
$4,000,000, or $0.27 per share, and the charge for purchased in-process research
and development of $21,900,000, or $1.45 per share, net loss and net loss per
share for the year ended December 31, 1998 would have been $6,958,000, or $0.46
per share.
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Revenues for 1998 decreased $21,775,000, or 27%, to $60,094,000 compared to
$81,869,000 for 1997. On April 23, 1998, we sold our linguistic software assets
to Lernout & Hauspie for $19,500,000, plus an additional amount for certain
receivables net of certain liabilities. Excluding the revenues associated with
the assets sold to Lernout & Hauspie, net revenues increased approximately 11%
to $53,116,000 for 1998 compared to $47,818,000 for 1997. Excluding the revenues
associated with the assets sold to Lernout & Hauspie, revenues from direct and
indirect product licenses to corporations and other end-users represented
approximately 42% of the revenue total for 1998. Of the total revenues in 1998,
approximately 11% were revenues from the acquisitions of Sherpa Systems
Corporation, Paradigm Development Corporation, MediaBank, and ViewPort
Development AB. Net revenues declined in 1998 over 1997 also as a result of an
increase of $2,147,000 in returns, refunds, and allowances. Revenues from
product licenses in 1998 decreased $24,902,000, or 32%, to $51,758,000 compared
to $76,660,000 for 1997. The decline was mainly due to the sale of our
linguistic assets to Lernout and Hauspie as noted above as well as a decline in
revenue from our IED operating segment. Service revenues in 1998 increased
$3,127,000, or 60%, to $8,336,000 compared to $5,209,000 for 1997. The increase
was mainly due to an increase in maintenance support and consulting sold with
our product offerings as well as added service revenues from the acquisition of
the PDM segment in December 1998.
Revenues from the IED (formerly DDE) segment declined by approximately 9%
from $31,362,000 in 1997 to $28,585,000 in 1998. The decline was mainly due to
lower sales of Quick View Plus as we exited our retail business and experienced
lower volume with corporate customers. Revenues from the Electronic Publishing
Solutions and PDM segments increased 49% from $16,441,000 in 1997 to $24,557,000
in 1998. The increase was primarily related to our DynaBase product that was
launched at the end of 1997 as well as the addition of the PDM products in
December 1998. Revenues from the Lexical and Linguistic segment declined by
$27,114,000 from $34,066,000 in 1997 to $6,952,000 in 1998 as a result of the
sale to Lernout & Hauspie mentioned above.
17
Gross profit decreased $24,614,000, or 34%, from $72,058,000 for 1997 to
$47,444,000 for 1998. Excluding the gross profit associated with the assets
sold to Lernout & Hauspie, gross profit decreased $172,000, or less than 1%, to
$41,385,000 for 1998 from $41,557,000 for 1997. Gross profit as a percentage of
revenues, excluding the gross profit associated with the assets sold to Lernout
& Hauspie, was 78% for 1998 compared to 87% for 1997. The decrease in the gross
margin from 1998 to 1997 was primarily due to an increase in amortization
expense for capitalized software in 1998 as well as amortization related to
certain customer licenses acquired through the acquisition of Sherpa Systems
Corporation of $1,055,000. Additionally, the cost to provide service revenue
increased at a faster rate than the associated revenue thereby contributing to
the decline in the gross margin percentage.
Total operating expenses increased $12,089,000 to $86,019,000 for 1998 from
$73,930,000 for 1997. Included in the total operating expenses for 1998 were
acquisition charges of $21,900,000 for certain purchased technology under
research and development by Sherpa Systems Corporation, Paradigm Development
Corporation, the MediaBank media asset management system and ViewPort
Development AB at the time of the 1998 acquisitions. Included in total
operating expenses for 1997 were acquisition charges of $6,100,000 for certain
purchased technology under research and development by Level Five Research,
Inc., Henderson Software, Inc. and Mastersoft products and technologies at the
time of the 1997 acquisitions and restructuring expenses of $5,848,000 relating
to our Information Products and certain of the Information Management Tools
product lines. Excluding the 1998 and 1997 aforementioned special charges as
well as the operating expenses associated with the assets sold to Lernout &
Hauspie, operating expenses increased $10,137,000, or 20%, to $61,556,000 for
1998 compared to $51,419,000 for 1997.
Sales and marketing expenses consist primarily of salaries, commissions,
and bonuses for sales and marketing personnel and promotional expenses. Sales
and marketing expenses increased $3,915,000, or 17%, to $27,463,000 for 1998
from $23,548,000 for 1997. Excluding the sales and marketing expenses
associated with the assets sold to Lernout & Hauspie, sales and marketing
expenses increased $4,516,000, or 20%, for 1998 compared to 1997. The increase
was primarily the result of costs relating to the reorganization of the sales
and marketing departments as well as a charge of $4,000,000 related to an
international distributor. During 1998, we entered into an international
distribution agreement that provided the distributor with guaranteed levels of
net receipts, as defined by the agreement, of $2,000,000 for each year ended
December 31, 1999 and 2000. As of December 31, 1998, we believed that the
distributor would not be able to achieve defined net receipts in either year.
Therefore, the Company recorded a charge to sales and marketing expenses of
$4,000,000. Excluding the sales and marketing expenses associated with the
assets sold to Lernout & Hauspie, sales and marketing expenses were 51% of
revenues for 1998 compared to 47% for 1997. The increase in sales and marketing
expenses as a percentage of revenues was primarily due to the aforementioned
distributor charge.
Product development costs consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Product development expenses decreased $2,565,000, or 12%, from
$22,094,000 for 1997 to $19,529,000 for 1998. Excluding the product development
expenses associated with the assets sold to Lernout & Hauspie, product
development costs increased by $3,956,000, or 28%, for 1998 compared to 1997.
The increase was primarily due to lower capitalized costs in 1998 due to the
release of DynaBase product at the end of 1997 as well as additional development
expenses for the 1998 acquisitions. Our product development costs, excluding
the product development expenses associated with the assets sold to Lernout &
Hauspie, were 34% of revenues for 1998 compared to 29% of revenues for 1997.
General and administrative expenses increased $718,000, or 5%, from
$14,868,000 in 1997 to $15,586,000 for 1998. Excluding the administrative
expenses associated with the assets sold to Lernout & Hauspie, general and
administrative expenses increased $1,596,000, or 12%, for 1998 compared to 1997.
The increase in general and administrative expenses was primarily due to
increases in personnel costs and facilities costs. General and administrative
expenses, excluding the expenses associated with the assets sold to Lernout &
Hauspie, were 28% of revenues for 1998 and 1997.
As a result of the current year operating loss, we have recorded a benefit
for net operating loss carrybacks for taxes paid in the prior years but have
provided a full valuation allowance on our net operating loss carryforwards and
other deferred tax assets in excess of deferred tax liabilities. In 1997, our
effective tax rate was influenced by in-process research and development charges
of $6,100,000 as discussed above.
18
Excluding the $13,289,000, or $0.85 per share, gain on sale of the assets
sold to Lernout & Hauspie, the $21,900,000, or $1.43 per share, write-off
related to the Paradigm Development Corporation, Sherpa Systems Corporation,
MediaBank, and ViewPort Development AB in-process research and development
charges, and the sales and marketing charge of $4,000,000, or $0.27 per share,
net loss and loss per share for 1998 would have been $6,958,000, or $0.46 per
share, respectively. Excluding the 1997 $6,100,000, or $0.43 per share, Level
Five Research, Inc., Henderson Software, Inc., and Mastersoft products and
technologies purchased in process research and development charge and
restructuring expenses of $3,684,000, net of income taxes, or $0.26 per share,
relating to our Information Products and certain of our Information Management
Tools products, net income and earnings per share for 1997 would have been
$9,344,000 and $0.64 respectively.
We adopted the straight-line depreciation method for all equipment placed
in service on or after January 1, 1998. The equipment under the straight-line
method is being depreciated over the estimated useful life of the assets,
generally three to five years. We believe that the straight-line method of
depreciation provides a preferable matching between expected productivity and
cost allocation since the equipment's operating capacity and consumption
generally remains consistent over time. The change in depreciation methods was
not material to our operating results or our financial position.
Liquidity and Capital Resources
Our operating activities used cash of $34,473,000 for the year ended
January 31, 2000, compared to providing cash of $2,614,000 and $19,413,000 for
the years ended December 31, 1998 and 1997, respectively. The decreased
contribution from operating activities of $37,087,000 from the 1998 calendar
year to the 2000 fiscal year was due principally to the increased operating loss
in the year ended January 31, 2000 compared to year ended December 31, 1998.
Significant factors in this lower level of earnings were the net payment for the
insurance agreement with a major AAA-rated insurance carrier, pursuant to which
the insurance carrier assumed financial responsibly for the defense and ultimate
resolution of the securities class action suits filed in February 1999 (See Note
14 to the "Notes to Consolidated Financial Statements") and the charges related
to the fiscal 2000 restructuring actions and other special charges. Also
contributing to the decreased cash from operations was the payment for the
termination of a 1998 international distributor agreement (see Note 14 to the
"Notes to Consolidated Financial Statements"). The decreased contribution from
operating activities of $16,799,000 from 1998 to 1997 was primarily due to the
overall lower level of earnings in 1998, partially offset by increased
collections of accounts receivable in 1998. Cash flows used in fiscal 2000
operating activities, excluding the effects of the restructuring expenses,
special charges and payments for the termination of a 1998 international
distributor agreement were approximately $12,100,000.
Our investing activities provided cash of $44,719,000 for the year ended
January 31, 2000 compared to using cash of $20,724,000 and $36,886,000 for the
years ended December 31, 1998 and 1997. The increased contribution of
$65,443,000 in fiscal 2000 compared to 1998 was due to an increase in the net
proceeds from sales of marketable securities of $27,348,000 and a decrease in
payments of $37,868,000 relating to acquisitions. In fiscal 2000, we paid
$5,685,000 for certain expenses accrued in connection with the 1998
acquisitions, including $3,000,000 related to the renegotiation of the warrants
originally issued in connection with the acquisition of Sherpa Systems
Corporation (see Note 4 to the "Notes to Consolidated Financial Statements").
There were no new acquisitions in fiscal 2000. Proceeds received from
dispositions related to the fiscal 2000 sales of the DynaText product line and
the PDM division totaled $18,066,000 in the year ended January 31, 2000,
compared to $19,853,000 received in 1998 from the sale of our linguistics
software assets. The improvement in cash from investing activities of
$16,162,000 from 1997 to 1998 was primarily due to the 1998 proceeds of
$19,853,000 received from Lernout & Hauspie for the sale of our linguistic
software assets, a decrease in capitalized product development costs of
$1,449,000, and an increase in cash available from net sales of marketable
securities of $25,863,000 offset by an increase in acquisition activity of
$33,208,000. The 1998 acquisitions of Paradigm Development Corporation, Sherpa
Systems Corporation, MediaBank, and ViewPort Development AB were all paid for
using available cash. The investing activity in 1998 also included the payment
of $1,467,000 to the former principal stockholder of Electronic Book
Technologies, Inc., under the original terms of the agreement.
Our financing activities provided cash of $11,645,000 for the year ended
January 31, 2000 compared to $9,100,000 and $1,705,000 for the years ended
December 31, 1998 and 1997, respectively. The increase in fiscal 2000 over 1998
totaled $2,545,000, and related primarily to the one time payment in 1998 of
$3,784,000 in indebtedness assumed in connection with the acquisitions of Sherpa
Systems Corporation and Venture Labs, Inc., combined with $1,003,000 in payments
on capital leases in the year ended January 31, 2000. The majority of capital
leases were related to Sherpa Systems Corporation assets, which were sold in the
January 5, 2000 divestiture of the PDM division. The
19
increase in cash from financing activities from 1997 to 1998 relates to an
increase in the proceeds received from stock option exercises and proceeds from
repayment of notes receivable underlying stock purchase agreements, partially
offset by the December 1998 one time payment of $3,784,000 of indebtedness
assumed during the acquisitions of Sherpa Systems Corporation and Venture Labs,
Inc.
As of January 31, 2000, we had working capital of $35,456,000. Total cash,
cash equivalents, and marketable securities at January 31, 2000 were
$36,010,000. Due to the restructuring actions taken in fiscal 2000, the
disposition of the PDM division, and our planned corporate reorganization
announced on April 11, 2000, (see below), we anticipate that cash used in
operations in fiscal 2001 should be substantially lower than in fiscal 2000. We
believe that funds available and funds receivable from the recent sale of assets
will be sufficient to finance our operations through the foreseeable future.
On April 11, 2000, the Company announced that as part of its review of
strategic alternatives, which began in February 2000, the Board of Directors
determined that the most appropriate means to enhance shareholder value is for
the Company to remain independent and to focus all of its energies on its
DynaBase dynamic Web publishing system. As a result, the Company will pursue the
divestiture of its other assets, including the Information Exchange Division.
In line with this decision, the Company will immediately begin a corporate
reorganization designed to concentrate its operations in the DynaBase business,
which is a part of the eBusiness Technologies ("eBT") division. As part of this
management reorganization, the Company will close its headquarters in Boston
during May and will consolidate all corporate functions in Providence at eBT's
current offices. As a result, the majority of the Boston-based corporate
personnel will leave the Company in May, with a small number of personnel
relocating to Providence.
The Company's Board of Directors has determined that the Information
Exchange Division should be separated from the DynaBase business. Accordingly,
the Company is seeking acquirers for IED, which will be operated separately
pending such a transaction.
While we expect to incur costs to close our Boston headquarters, relocate
certain personnel and incur severance costs for the departure of certain
corporate personnel, we anticipate that the planned actions as a result of the
announced corporate reorganization will reduce the cash requirements to operate
our business over the next year. Furthermore, proceeds from the potential sale
of the IED division are expected to exceed the forecasted operating cash flows
of this division in fiscal 2001.
The December 1998 acquisition of Sherpa Systems Corporation included
estimated costs of approximately $5,800,000 for direct transaction costs and
costs relating to the elimination of excess and duplicative activities as a
result of the acquisition. During fiscal 2000, we reevaluated the estimated
severance costs relating to the elimination of excess and duplicative activities
as well as costs associated with certain contractual obligations, which existed
at the time of the acquisition, and reduced the related severance cost accrual
and goodwill by approximately $3,629,000. In fiscal 2000, payments against the
accrual totaled $1,635,000 for employee severance related to elimination of
duplicate functions, $400,000 for professional fees consisting principally of
appraisal, legal and accounting fees, and $39,000 for other out of pocket
expenses related to the acquisition. As of January 31, 2000, there was no
remaining liability for such costs.
On September 29, 1999, we entered into an insurance agreement with a major
AAA-rated insurance carrier pursuant to which the insurance carrier assumed
complete financial responsibility for the defense and ultimate resolution of the
securities class action suits, which were brought against us in February 1999.
In connection with this agreement, a net charge of $13,451,000 was recorded in
special charges in the accompanying consolidated statement of operations.
On June 2, 1999, we were informed that the United States Securities and
Exchange Commission has issued a Formal Order of Private Investigation in
connection with matters relating to the previously announced restatement of our
1998 financial results. We are cooperating with the Securities and Exchange
Commission. We cannot predict the ultimate resolution of this action at this
time, and there can be no assurance that the investigation will not have a
material adverse impact on our financial condition and results of operations.
Additionally, while it is not feasible to predict the total costs, we expect to
continue to incur further professional fees with respect to the Formal Order of
Private Investigation.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and
Microlytics Technology Co., Inc. (together "Microlytics") filed a complaint
against Inso in the United States Bankruptcy Court for the Western District of
New York. The lawsuit is captioned Microlytics, Inc. and Microlytics Technology
Co., Inc. v. Inso Corporation, Adversary Proceeding No. 99-2177. The complaint
seeks turnover of purported property of the estates and damages for Inso's
alleged breaches of a license from Microlytics relating to certain computer
software databases and other information. The complaint seeks damages of at
least $11,750,000. On August 19, 1999, we filed our Answer and Demand for Jury
Trial. Also, on August 19, 1999, we filed a motion to withdraw the case from
the Bankruptcy Court to the United States District Court for the Western
District of New York. On December 15, 1999, the United States District Court
granted our motion for the purposes of dispositive motions and trial. We
believe that the claims are subject to meritorious defenses, which we plan to
assert during the lawsuit. We cannot predict the ultimate resolution of this
action at this time, and there can be no assurance that the litigation will not
have a material adverse impact on our financial condition and results of
operations.
During February 2000, certain shareholders of Inso filed two putative class
action lawsuits against Inso and certain of Inso's officers and employees in the
United States District Court for the District of Massachusetts. The lawsuits
are captioned as follows: Liz Lindawati, et al. v. Inso Corp., et al., Civil
Action No. 00-CV-10305GAO; Group One Limited, et al. v. Inso Corp., et al.,
Civil Action No. 00-CV-10318GAO. These lawsuits were filed following our
preliminary disclosure of revenues for the fiscal year 2000 fourth quarter on
February 1, 2000. Both complaints assert claims for violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission, as well as a claim for violation of Section 20(a) of the
Exchange Act. The plaintiffs allege that the defendants prepared and issued
deceptive and materially false and misleading statements to the investing
public. They seek unspecified damages. We believe that the claims are subject
to meritorious defenses, which we plan to assert during the lawsuit. We cannot
predict the ultimate resolution of these actions at this time, and there can be
no assurance that the litigation will not have a material adverse impact on our
financial condition and results of operations.
20
In November 1998, the Board of Directors approved a change in our fiscal
year to February 1 through January 31, effective for the twelve-month period
ending January 31, 2000. Through December 31, 1998, we reported results on a
calendar year basis.
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, as amended by Statement of Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities"
(collectively SFAS 133) effective for fiscal years beginning after June 15,
2000. SFAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. We do not
believe that the adoption of this standard will have a material impact on our
financial position or results of operations.
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-9 (SOP
98-9) "Modification of SOP 97-2, Software Revenue Recognition with respect to
Certain Transactions" effective for fiscal years beginning after March 15, 1999.
SOP 98-9 defines vendor specific objective evidence of fair value in connection
with software revenue recognition. The adoption of SOP 98-9 is not expected to
have a material impact on our financial position or results of operations.
Acquired In-Process Research and Development
The Company's January 1999 and calendar year 1998 acquisitions included
certain material purchased in-process research and development charges for
Venture Labs, Inc., Sherpa Systems Corporation, and MediaBank totaling
$22,400,000. These amounts were expensed as non-recurring charges on the
respective acquisition dates as the acquired technology had not yet reached
technological feasibility and therefore had no alternative future uses. At the
time of the acquisitions, the Company engaged an independent appraiser to
estimate the fair market value of the assets acquired, to serve as a basis for
the allocation of the purchase price.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relates to the
completion of all planning, designing, prototyping, verification, and testing
activities necessary to establish that each product can be produced to meet its
design specifications, including functions, features, and technical performance
requirements.
The values of the purchased in-process research and development were based
upon future revenues to be earned upon commercialization of the products. These
cash flows were discounted back to their net present value. The resulting
projected net cash flows from such projects were based on management's estimates
of revenues and operating profits related to such projects. The revenue
estimates used to value the in-process research and development were based on
estimates of relevant market sizes and growth factors, expected trends in the
related technology, and the nature and expected timing of new product
introductions by the Company and its competitors. The projected net cash flows
were discounted to their present value using the weighted average cost of
capital ("WACC"). The WACC calculation produces the average required rate of
return of an investment in an operating enterprise, based on required rates of
return from investments in various areas of the enterprise.
The estimates used in valuing the in-process research and development were
based upon assumptions the Company believed to be reasonable but which are
inherently uncertain and unpredictable. The assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
projected results. Any such variances may adversely affect the sales and
profitability of future periods. Additionally, the value of other intangible
assets recorded at the time of the respective acquisitions may become impaired.
AIS Software S.A.
The primary purchased in-process technology acquired in the AIS acquisition
was the DualPrism Web distribution technology. This is a flexible server-based
publishing technology that allows data stored in a number of possible
repositories, file systems, relational databases and object databases, to be
served dynamically to a standard World Wide Web browser. The Company estimates
that this project was 80% completed at the time of the acquisition. The nature
of the efforts required to develop the purchased in-process technology into
commercially viable products was substantially completed during fiscal 2000, and
AIS Software S.A. was subsequently sold as part of the January 2000
21
disposition of the PDM division.
Venture Labs, Inc.
The primary purchased in-process technologies acquired in the Venture Labs,
Inc. acquisition consisted of the Java filtering and viewing projects. The
Company estimates that the projects were between 75% and 85% complete at the
date of the Venture Labs, Inc. acquisition. As of January 31, 2000, the nature
of the efforts required to develop the purchased in-process technology into
commercially viable products was substantially completed.
Sherpa Systems Corporation
The primary purchased in-process technology acquired in the Sherpa Systems
Corporation acquisition was the SherpaWorks Version 3 product. This technology
was designed to implement a three-tier architecture, which will provide out-of-
the-box, configurable Product Data Management systems that are easy to use and
that support open standards-based interfaces. The Company estimated that this
project was approximately 85% complete at the date of the Sherpa acquisition.
The Company stopped development of SherpaWorks 3.0 in the third quarter of
fiscal 2000, given management's plans to divest of the PDM division, and Sherpa
Systems Corporation was subsequently sold as part of the January 2000
disposition of the PDM division.
MediaBank
The primary purchased in-process technologies acquired in the MediaBank
acquisition consisted of the new digital asset management products, which were
divided into two projects. The first project was a media asset management
technology that provides support for standard query language (SQL) databases,
such as Oracle 7 and Microsoft's SQL Server. In addition, this project also
provides server capabilities that allow users to manage and retrieve assets
stored in the asset management systems through a standard Web browser. The
Company estimates that this project was 85% complete at the time of the
MediaBank acquisition. As of January 31, 2000, the nature of the efforts
required to develop the first project into commercially viable products was
substantially completed.
The second project provides content management capabilities based on the
contents of text embedded in popular text formats that are stored in the
database. In addition, the second project provides support for DB2, a popular
relational database developed by IBM, and IBM's Content Manager (formerly
Digital Library) product. The Company estimates that this project was 30%
complete at the time of the MediaBank acquisition. As of January 31, 2000, the
nature of the efforts required to develop this project into commercially viable
products was substantially completed.
Year 2000
General
Many components of computers and the programs that run on them were
designed with attention to only the last two digits of the calendar year. Any
equipment or program recognizing only two digits may recognize a date using 00
as the year 1900 rather than the year 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Year 2000 issue created risk for us from unforeseen problems in our
products or our own computer systems and from third parties with whom we
transact business worldwide.
Prior to December 31, 1999, we commenced and completed a phased Year 2000
Compliance Plan (the "Plan") which addressed the software we license and all
software on which we depend, the hardware, operating systems and software on
which we run our business and the third-party services on which we also depend.
The costs were not material to our operations and total costs of implementing
the Plan were not material to our fiscal year 2000 results.
All of our hardware and software systems successfully transitioned to the
year 2000. We have not experienced any significant problems as a result of the
Year 2000 issue with our own systems or those of our vendors. However, the
potential still exists for a non-compliant system, either internally or at a
vendor, to malfunction due to Year 2000 issues and cause a disruption to our
business. Due to the uncertain nature of this issue, we can not determine at
this time whether the consequences of a potential Year 2000 failure will have a
material impact on our results of operations and financial condition. We believe
that, with the successful transition to the Year 2000, the possibility of
significant interruptions of
22
normal operations should be minimal.
Inso Products
Our products that we have continued to license in the Year 2000 were tested
for Year 2000 compliance. Additionally, prior to December 31, 1999, we
completed our assessment of the products that we license as components of
products that we sell. Our current products are not considered date dependent.
Some of our customers use products or product versions that we did not test, and
do not support, for Year 2000 compliance. We have encouraged these customers to
migrate to current products or versions that meet our Year 2000 compliance
definition. In addition, we have not tested any of our custom code for Year
2000 compliance. Although Year 2000 problems may not become evident until long
after January 1, 2000, we do not expect significant Year 2000 related business
disruptions in the future.
The costs of these efforts have not been material, however, there can be no
assurances that we will not incur future material costs related to the Year 2000
issue.
Inso Internal Systems, Facilities and External Vendors
We contacted all mission critical utility and facilities vendors on which
we depend. These vendors provided us with compliance statements certifying that
they would be year 2000 compliant by the end of calendar 1999. Despite our
investigations of the Year 2000 issue, it is possible that those certifications
as well as the other representations we have obtained could be erroneous. The
cost of this effort and the projected completion costs have not been material.
However, we may experience future material unanticipated problems and costs by
undetected errors of technology used in our internal IT and non-IT systems.
We will continue to monitor our critical computer applications, and those
of our vendors, to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
Certain Factors that May Affect Future Operating Results
We intend to substantially increase our sales and marketing organization,
especially in the eBT division. This could burden our level of sales and
marketing expenditures relative to revenues, which could lower our operating
margins in future periods.
Our ability to remain competitive in the computer software industry is
dependent on the services of a number of key management and technical personnel,
principally software engineers. Personnel costs for technical staff represent a
significant portion of our operating expenses, and increased competition and
related personnel cost increases for such staff could have a material adverse
impact on our operating results. Additionally, because of the recent drop in
Inso's stock price we may need to use larger amounts of cash to compensate our
employees, rather than the equity incentives we have relied on in prior periods.
This could result in reduced operating margins as a result of higher personnel
costs.
We operate in highly competitive markets. The eBT division's market tends
to be dominated by companies such as Vignette, Broadvision and Interwoven, which
have substantially greater development, marketing, sales and financial resources
than we do. Because of our limited resources, in order to compete with these
companies it is likely that we will be required to enter into relationships or
agreements with systems integrators and other distribution partners. The
failure to create and foster such relationships could jeopardize our ability to
compete in these markets.
We have invested significant development resources in products utilizing
standards-based publishing formats, such as XML, and we intend to invest
significant resources in technologies and standards for the mobile and wireless
market. Should large numbers of customers and potential customers not ultimately
adopt such formats and standards, it is possible that there may be a limited
market for the products we are currently developing, which could have an adverse
impact on future revenues and operating results.
We have historically received a significant portion of our revenues from
OEMs that integrate our products with their own products and market them to end-
users as a single unit. The business of our OEM customers is intensely
competitive, while the computer software industry has continued to consolidate.
As a result, the number of potentially significant OEM customers for our
products has declined and there is increasing competitive pressure for our
existing and potential customers to reduce costs.
23
As was the case in 1998, it is possible that certain of the major operating
system developers, including Microsoft and Symbian, may add features and
functionality to such operating systems that may compete with our products or
with those of our other OEM customers. The concentration of the market for
operating systems makes it difficult or impossible for us or our other OEM
customers to compete on a price basis because purchasers of operating systems
would be required to purchase products as part of the operating system that
compete with our products. In addition, certain OEM customers, such as
Microsoft, may choose to internally develop products that compete with our
products in order to reduce their costs.
We have relied on acquisitions to create growth and provide new
technologies. The majority of our revenues in fiscal 2000 were derived from
businesses that were acquired by us during 1995 or thereafter, and it is
anticipated that all our revenues will come from such acquired businesses in
fiscal 2001. As a result of recent adverse trends in the price of our common
stock, it may be more difficult for us to engage in acquisitions in the future,
which could slow our revenue growth. In addition, there is no assurance that we
will be able to integrate and manage successfully businesses or assets that we
have acquired or may acquire in the future. If our management is unable to
manage such acquisitions effectively, the quality of our products; our ability
to identify, hire, and retain key personnel; and the results of operations could
be materially adversely affected.
During February 2000, certain shareholders of Inso filed two putative class
action lawsuits against Inso and certain of Inso's officers and employees in the
United States District Court for the District of Massachusetts. While we
believe that the claims are subject to meritorious defenses, which we plan to
assert during the lawsuit, we cannot predict the ultimate resolution of these
actions at this time, and there can be no assurance that the litigation will not
have a material adverse impact on our financial condition and results of
operations.
We intend to increase the marketing of our products directly to customers
outside the United States. The marketing of products directly to customers
outside the United States increases the risk to our revenues associated with
fluctuations of the U.S. dollar in relation to foreign currencies. Such
fluctuations could also result in increased operating expenses associated with
foreign operations.
Our business could be harmed if the growth of the Internet does not
continue. To the extent that businesses do not continue to adopt the Internet
as critical to their future plans, we may experience difficulty expanding our
customer base. Further, the growth of the Internet as a medium for business
requires the acceptance and adoption of new paradigms for operating traditional
businesses, and we cannot be certain that this will occur as rapidly or
completely as we hope. Many companies have already invested substantial
resources in other means of conducting commerce and exchanging information, and
they may be unwilling to quickly move to Internet-based strategies to achieve
these objectives.
Even with substantial Internet growth, it is possible that the existing and
future Internet infrastructure may not be able to support the additional demands
placed upon it. This could lead to delays in implementation of Internet-based
technologies, including those we market.
Future legislation or regulations could be enacted that directly or
indirectly impact our ability to market our products, especially in the area of
Internet commerce. It is impossible to predict if or how any future legislation
or regulations would impact the Internet and our business.
Recent Developments
See Item 1. Business - Recent Developments for a discussion of Inso's April
11, 2000 press release concerning the Board of Director's strategic decision to
immediately begin a corporate reorganization designed to concentrate all of its
operations in Inso's DynaBase business that is a part of the eBT division.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Inso is exposed to the impact of interest rate and foreign currency
fluctuations. Our cash equivalents and available for sale investments are
exposed to financial market risk due to fluctuation in interest rates, which may
affect our interest income and the fair value of our investments. We manage the
exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and investing in short-term investment grade corporate
24
securities, United States agency bonds, and asset backed securities. In
addition, we do not use investments for trading or other speculative purposes.
We have performed a sensitivity analysis assuming a hypothetical 10% adverse
fluctuation in interest rates. As of January 31, 2000, the analysis indicated
that the change in interest income would not have a material adverse effect on
our financial position or results of operations. Additionally, the carrying
value of our investments approximates the fair value and therefore the impact of
a fluctuation in interest rates to the carrying value is not material to our
financial position or results of operations. However, actual interest income
and gains and losses in the future may differ materially from our analysis.
We transact business in various foreign currencies, primarily in certain
European countries, Japan and Australia, and therefore are subject to exposure
from movements in foreign currency exchange rates. We primarily license our
technology in U.S. dollars but operating expenses are denominated in the local
currency. For fiscal 2000, we do not believe we had significant exposure
associated with movements in foreign currency exchange rates. We will evaluate
the exposures going forward and will implement the appropriate risk management
procedures as deemed necessary.
We had certain forward exchange contracts (primarily British Pounds
Sterling, German Marks, Italian Lira, French Francs, and Swiss Francs), which
matured in January 1999, with a notional amount outstanding of approximately
$2,820,000. The estimated unrealized gains and losses for these forward
exchange contracts were not material to our results of operations or financial
position for fiscal 2000. We did not renew these contracts.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and supplementary data are
included under Item 14 of this Annual Report and incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required to be furnished pursuant to this item is set forth
under the caption "Executive Officers of the Registrant" in Part I hereof and
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's proxy statement ("Proxy
Statement"), to be furnished to stockholders in connection with the solicitation
of proxies for use at the June 1, 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is set forth
under the captions "Directors Compensation," "Summary Compensation Table,"
"Stock Option Grants," "Aggregated Option Exercises and Year-End Option Table,"
and "Severance Agreements" in the Proxy Statement and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is set forth
under the caption "Security Ownership" in the Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is set forth
under the caption "Certain Transactions" in the Proxy Statement and is
incorporated herein by reference.
25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Consolidated Financial Statements
The consolidated financial statements listed in the accompanying Index
to Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this Annual Report.
2. Consolidated Financial Statement Schedule
The consolidated financial statement schedule listed in the
accompanying Index to Consolidated Financial Statements and Financial
Statement Schedule is filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as
part of this Annual Report.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 2000
We filed two (2) reports on Form 8-K during the quarter ended January
31, 2000.
(i) Current Report on Form 8-K dated October 29, 1999, reporting
under Item 2. (Acquisition or Disposition of Assets) the sale of
the Company's DynaText/DynaWeb stand-alone technical document
publishing component of its Product Data Management Division,
along with its ViewPort browser technology assets, which was
filed with the Securities and Exchange Commission on November 15,
1999.
(ii) Current Report on Form 8-K dated January 5, 2000, reporting under
Item 2. (Acquisition or Disposition of Assets), the sale of the
remaining interest in the Company's Product Data Management
("PDM") Division, which was filed with the Securities and
Exchange Commission on January 19, 2000.
26
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Inso Corporation
Registrant
----------
/s/ James M. Ringrose
______________________________________
Date: April 19, 2000 James M. Ringrose
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert F. Dudley
------------------------------------------
Date: April 19, 2000 Robert F. Dudley
Vice President and Chief Financial Officer
(Chief Accounting Officer)
/s/ Joseph A. Baute
------------------------------------------
Date: April 19, 2000 Joseph A. Baute, Director
/s/ Samuel H. Fuller
------------------------------------------
Date: April 19, 2000 Samuel H. Fuller, Director
/s/ Stephen O. Jaeger
------------------------------------------
Date: April 19, 2000 Stephen O. Jaeger
Chairman and Director
/s/ Joanna T. Lau
------------------------------------------
Date: April 19, 2000 Joanna T. Lau, Director
/s/ Edward Terino
------------------------------------------
Date: April 19, 2000 Edward Terino, Director
/s/ William J. Wisneski
------------------------------------------
Date: April 19, 2000 William J. Wisneski, Director
27
Item 14(a). Index to Consolidated Financial Statements and Financial Statement
Schedule
Page
----
Report of Independent Auditors............................................................................... 30
Consolidated Balance Sheets at January 31, 2000 and December 31, 1998........................................ 31
Consolidated Statements of Operations for the years ended January 31, 2000, December 31, 1998 and 1997,
and the one month ended January 31, 1999..................................................................... 32
Consolidated Statements of Cash Flows for the years ended January 31, 2000, December 31, 1998 and 1997,
and the one month ended January 31, 1999..................................................................... 33
Consolidated Statements of Stockholders' Equity for the year ended January 31, 2000, the one month ended
January 31, 1999 and the years ended December 31, 1998 and 1997............................................. 34
Notes to Consolidated Financial Statements................................................................... 35
Schedule for the years ended January 31, 2000, December 31, 1998 and 1997, and the one month ended
January 31, 1999:
Schedule II Valuation and Qualifying Accounts............................................................... 59
All other schedules have been omitted since the required information is not
present, or the amounts are not sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements.
28
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Inso Corporation
We have audited the accompanying consolidated balance sheets of Inso
Corporation as of January 31, 2000 and December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years ended January 31, 2000, December 31, 1998 and 1997, and
the one month ended January 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Inso
Corporation at January 31, 2000 and December 31, 1998, and the consolidated
results of its operations and its cash flows for each of the three years ended
January 31, 2000, December 31, 1998 and 1997, and the one month ended
January 31, 1999, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 6, 2000, except for Note 16, as to
which the date is April 11, 2000
29
INSO CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 and DECEMBER 31, 1998
(In thousands, except share amounts)
January 31, December 31,
2000 1998
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 31,408 $ 9,502
Marketable securities 4,602 44,555
Restricted marketable securities - 6,526
Accounts receivable, net of allowances of $3,139 and $4,106
in 2000 and 1998, respectively 14,469 27,588
Receivables from asset sales 5,723 -
Prepaid expenses and other current assets 2,719 5,223
--------- --------
Total current assets 58,921 93,394
Property and equipment, net 5,034 9,865
Product development costs, net of accumulated amortization of $11,375,
and $9,589 in 2000 and 1998, respectively 10,402 21,322
Excess of costs over net assets acquired, net of accumulated amortization of
$4,628 and $3,013 in 2000 and 1998, respectively 2,055 19,891
Other intangible assets, net of accumulated amortization of $1,860 and
$4,605 in 2000 and 1998, respectively 1,005 10,783
Long-term accounts receivable 877 2,901
Licensed technology and advances, net 2,295 2,408
Investment in Information Please LLC - 2,655
--------- --------
TOTAL ASSETS $ 80,589 $163,219
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,295 $ 2,207
Accrued liabilities 8,910 9,771
Accrued salaries, commissions and bonuses 4,924 6,444
Acquisition related liabilities (including in 1998, $7,282 due to Sherpa - 16,551
selling shareholders)
Unearned revenue 8,205 13,542
Royalties payable 56 1,615
Capital leases, current portion 75 987
--------- --------
Total current liabilities 23,465 51,117
Other liabilities, long term 1,093 -
Unearned revenue, non-current portion 517 2,478
Capital leases, non-current portion 142 450
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
Common stock, $.01 par value; 50,000,000 shares authorized; 16,588,773 and
15,506,640 shares issued at January 31, 2000 and December 31, 1998, respectively
Common stock 165 155
Capital in excess of par value 156,098 140,130
Accumulated deficit (100,633) (29,632)
--------- --------
55,630 110,653
Unamortized value of restricted shares - (116)
Notes receivable from stock purchase agreements (200) (1,305)
Treasury stock, at cost, 5,075 shares in 2000 and 1998 (58) (58)
--------- --------
Total stockholders' equity 55,372 109,174
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,589 $163,219
========= ========
See accompanying Notes to Consolidated Financial Statements.
30
INSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2000, DECEMBER 31, 1998 and 1997
AND THE ONE MONTH ENDED JANUARY 31, 1999
(In thousands, except per share amounts)
Year Ended One Month Ended
January 31, January 31, Years Ended December 31,
2000 1999 1998 1997
---- ---- ---- ----
Revenues:
Product licenses $ 40,781 $ 1,819 $ 51,758 $76,660
Service 23,899 1,289 8,336 5,209
-------- ------- -------- -------
Total revenues 64,680 3,108 60,094 81,869
Cost of revenues:
Cost of product licenses 10,262 2,332 9,362 7,950
Cost of service 11,948 1,015 3,288 1,861
-------- ------- -------- -------
Total cost of revenues 22,210 3,347 12,650 9,811
-------- ------- -------- -------
Gross profit (loss) 42,470 (239) 47,444 72,058
Operating expenses:
Sales and marketing 24,559 2,725 27,463 23,548
Product development 26,079 2,535 19,529 22,094
Amortization of intangible assets 4,248 304 1,541 1,472
General and administrative 21,527 2,741 15,586 14,868
Restructuring expenses 11,068 - - 5,848
Special charges 28,103 - - -
Purchased in-process research and development - 500 21,900 6,100
-------- ------- -------- -------
Total operating expenses 115,584 8,805 86,019 73,930
-------- ------- -------- -------
Operating loss (73,114) (9,044) (38,575) (1,872)
Non-operating income (expense):
Net investment income 1,721 353 4,682 4,376
Write-down of investment in Information Please LLC (2,655) - - -
Gain on sale, net 12,212 - 13,289 -
-------- ------- -------- -------
(Loss) income before provision for income taxes (61,836) (8,691) (20,604) 2,504
Provision (benefit) for income taxes 474 - (1,035) 2,944
-------- ------- -------- -------
Net loss $(62,310) $(8,691) $(19,569) $ (440)
======== ======= ======== =======
Loss per share $(3.98) $(0.56) $(1.30) $(0.03)
======== ======= ======== =======
See accompanying Notes to Consolidated Financial Statements.
31
INSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2000, DECEMBER 31, 1998 AND 1997
AND ONE MONTH ENDED JANUARY 31, 1999
(In thousands of dollars)
Year Ended One Month Ended Year Ended Year Ended
January 31, January 31, December 31, December 31,
2000 1999 1998 1997
--------- -------- --------- ---------
Cash flows provided by (used in) operating activities:
Net loss $(62,310) $(8,691) $(19,569) $ (440)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 3,440 368 3,371 3,664
Amortization 12,246 2,325 7,086 4,851
Purchased in-process research and development - 500 21,900 6,100
Non-cash stock compensation expense 1,482 - - -
Non-cash restructuring expenses 5,490 - - 5,045
Non-cash special charges expenses 10,805 - - -
Write-down of investment in Information Please LLC 2,655 - - -
Deferred income taxes - - (70) 108
Gain on sales of assets, net (12,212) - (13,289) -
-------- ------- -------- --------
(38,404) (5,498) (571) 19,328
Changes in operating assets and liabilities:
Accounts receivable 7,781 3,419 3,501 (2,796)
Accounts payable and accrued liabilities (1,929) 1,724 (1,084) 4,016
Royalties payable (1,048) (367) (1,036) (595)
Due to Houghton Mifflin Company - - (396) (283)
Other assets and liabilities (873) 1,315 2,200 (257)
-------- ------- -------- --------
Net cash (used in) provided by operating activities (34,473) 593 2,614 19,413
Cash flows provided by (used in) investing activities:
Property and equipment expenditures (2,128) (169) (2,982) (5,187)
Capitalized product development costs (3,746) (393) (4,906) (6,355)
Acquisitions, net of cash acquired - (5,883) (43,553) (10,345)
Payments related to 1998 acquisitions (5,685) (2,027) - -
Net proceeds from sales of marketable securities 38,212 7,982 10,864 (14,999)
Proceeds from the sale of assets, net 18,066 - 19,853 -
-------- ------- -------- --------
Net cash provided by (used in) investing activities 44,719 (490) (20,724) (36,886)
Cash flows provided by financing activities:
Net proceeds from issuance of common stock 11,543 - 11,695 1,705
Proceeds from the payment of notes receivable underlying
Stock Purchase Agreements 1,105 - 1,189 -
Payments under capital lease obligations (1,003) (88) - -
Repayment of acquired company debt - - (3,784) -
-------- ------- -------- --------
Net cash provided by financing activities 11,645 (88) 9,100 1,705
Net increase (decrease) in cash and cash equivalents 21,891 15 (9,010) (15,768)
Cash and cash equivalents at beginning of period 9,517 9,502 18,512 34,280
-------- ------- -------- --------
Cash and cash equivalents at end of period $ 31,408 $ 9,517 $ 9,502 $ 18,512
======== ======= ======== ========
See accompanying Notes to Consolidated Financial Statements.
32
INSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
Notes
Unamortized receivable
Capital in value of from stock
Common stock excess of Accumulated restricted purchase Treasury stock
------------ --------------
Shares Amount par value deficit shares agreements Shares Amount
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 14,293,249 $143 $123,472 ($ 9,623) ($521) $ - 5,075 ($58)
Issuance of shares pursuant to
Employee Stock Purchase Plan 43,912 998
Notes Receivable from Stock
Purchase Agreements 243,291 2 2,492 (2,494)
Stock options exercised 62,500 1 713
Cancellation of restricted shares (5,341) (87) 87
Other issuances and repurchases 8,000 199
Amortization of restricted shares 194
Tax benefit - stock option 400
exercises
Net loss* (440)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 14,645,611 $146 $128,187 ($ 10,063) ($240) ($2,494) 5,075 ($58)
Issuance of shares pursuant to
Employee Stock Purchase Plan 128,199 1 1,354
Proceeds from Notes Receivable
from Stock Purchase
Agreements 1,189
Stock options exercised 716,330 8 10,332
Issuance of restricted shares 7,500 135 (135)
Other issuances and repurchases 9,000 122
Amortization of restricted shares 259
Net loss* (19,569)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 15,506,640 $155 $140,130 ($ 29,632) ($116) ($1,305) 5,075 ($58)
Stock options exercised 200 2
Other issuances and repurchases 9,000 156
Amortization of restricted shares 14
Net loss* (8,691)
--------------------------------------------------------------------------------------------
Balance at January 31, 1999 15,515,840 $155 $140,288 ($ 38,323) ($102) ($1,305) 5,075 ($58)
Issuance of shares pursuant to
Employee Stock Purchase Plan 184,323 2 1,076
Proceeds from Notes Receivable
from Stock Purchase
Agreements 1,105
Stock options exercised 851,466 8 10,111
Cancellation of restricted shares (3,750) (23) 23
Issuance of warrants 2,010
Exercise of warrants 34,644 346
Other issuances and repurchases 6,250 546
Acceleration of stock options 1,744
Amortization of restricted shares 79
Net loss* (62,310)
--------------------------------------------------------------------------------------------
Balance at January 31, 2000 16,588,773 $165 $156,098 ($100,633) $ - ($ 200) 5,075 ($58)
--------------------------------------------------------------------------------------------
Total
--------
Balance at December 31, 1996 $113,413
Issuance of shares pursuant to
Employee Stock Purchase Plan 998
Notes Receivable from Stock
Purchase Agreements -
Stock options exercised 714
Cancellation of restricted shares -
Other issuances and repurchases 199
Amortization of restricted shares 194
Tax benefit - stock option 400
exercises
Net loss* (440)
--------
Balance at December 31, 1997 $115,478
Issuance of shares pursuant to
Employee Stock Purchase Plan 1,355
Proceeds from Notes Receivable
from Stock Purchase
Agreements 1,189
Stock options exercised 10,340
Issuance of restricted shares -
Other issuances and repurchases 122
Amortization of restricted shares 259
Net loss* (19,569)
--------
Balance at December 31, 1998 $109,174
Stock options exercised 2
Other issuances and repurchases 156
Amortization of restricted shares 14
Net loss* (8,691)
--------
Balance at January 31, 1999 $100,655
Issuance of shares pursuant to
Employee Stock Purchase Plan 1,078
Proceeds from Notes Receivable
from Stock Purchase
Agreements 1,105
Stock options exercised 10,119
Cancellation of restricted shares -
Issuance of warrants 2,010
Exercise of warrants 346
Other issuances and repurchases 546
Acceleration of stock options 1,744
Amortization of restricted shares 79
Net loss* (62,310)
--------
Balance at January 31, 2000 $ 55,372
--------
* Net loss equals comprehensive loss for each period presented.
See accompanying Notes to Consolidated Financial Statements.
33
Inso Corporation Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Inso Corporation (the "Company") supplies software solutions for the
management, exchange and dynamic delivery of critical business information and
applications. At January 31, 2000, the Company has two operating divisions:
eBusiness Technologies and Information Exchange. Through enterprise license
agreements, integration in popular software products and bundling agreements,
the Company's products enable customers to develop and deploy content-rich e-
business solutions and provide comprehensive information access solutions for
delivering business information in both connected and wireless computing
environments. The Company markets certain of its products worldwide to original
equipment manufacturers (OEM's) of computer hardware, software, and consumer
electronics products. The Company also directly and indirectly markets software
applications and systems to major corporations, government agencies and other
end-users. As part of the Company's new divisional structure, announced in April
1999, the Company decentralized certain administrative and sales functions, and
restructured into three divisions, two of which are described above, and a third
division - Product Data Management. The Product Data Management division was
comprised of technologies obtained in connection with the acquisition in 1998 of
Sherpa Systems Corporation, as well as certain technologies from the division
formerly referred to as Electronic Publishing Solutions. The PDM division was
sold in two transactions, both of which took place during fiscal 2000 (see Note
5). The Company's divisional structure currently encompasses the remaining IED
and eBT divisions, both of which operate as separate business units.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in less than 20% owned affiliates
are accounted for under the cost method.
Change in Year End
In November 1998, the Board of Directors approved a change in the Company's
fiscal year to February 1 through January 31, effective for the twelve-month
period ending January 31, 2000. Through December 31, 1998, the Company reported
results on a calendar year basis. The Consolidated Statement of Operations and
the Consolidated Statement of Cash Flows for the one month ended January 31,
1999 are presented in the consolidated financial statements. For comparative
purposes, the Condensed Consolidated Statement of Operations (unaudited) and the
Condensed Consolidated Statement of Cash Flows (unaudited) for the one month
ended January 31, 1998 is provided below:
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands of dollars, except per share amounts)
One Month Ended
January 31, 1998
----------------
Revenues............................................................................ $ 2,376
Cost of revenues.................................................................... 923
-------
Gross profit........................................................................ 1,453
Operating expenses.................................................................. 5,225
-------
Operating loss...................................................................... (3,772)
Non-operating income................................................................ 313
-------
Pre-tax loss........................................................................ (3,459)
Income tax benefit.................................................................. (1,282)
-------
Net loss............................................................................ $(2,177)
=======
Net loss per share.................................................................. $ (0.15)
Weighted average shares outstanding................................................. 14,669
34
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands of dollars)
One Month Ended
January 31, 1998
----------------
Cash flows used in operating activities:
Net loss.......................................................................... $(2,177)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization..................................................... 497
Changes in operating assets and liabilities......................................... (379)
-------
Net cash used in operating activities............................................... (2,059)
Cash flows used in investing activities:
Property and equipment expenditures............................................... (223)
Acquisitions, net of cash acquired................................................ (1,467)
Net purchases of marketable equity securities..................................... (6,295)
-------
Net cash used in investing activities............................................... (7,985)
Cash flows provided by financing activities:
Net proceeds from issuance of common stock........................................ 359
-------
Net cash provided by financing activities........................................... 359
Net decrease in cash and cash equivalents........................................... (9,685)
Cash and cash equivalents at beginning of period.................................... 18,512
-------
Cash and cash equivalents at end of period.......................................... $ 8,827
=======
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
Additional Cash Flow Statement Information
One Month
Year Ended Ended January
January 31, 31, Years Ended December 31,
2000 1999 1998 1997
---- ---- ----- ------
Supplemental disclosures of cash flow information:
-------------------------------------------------
Cash paid for income taxes........................ $ 408 $ - $ 230 $3,290
Non-cash investing and financing information:
--------------------------------------------
Receivables from asset sales...................... 5,723 - - -
Investment in Information Please LLC.............. - - - 2,620
Issuance of Notes Receivable from Stock Purchase
Agreements...................................... - - - 2,494
Investments
The Company accounts for its investments in securities, including certain
cash equivalents and marketable securities, in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The appropriate classification of debt securities
is determined at the time of purchase and is reevaluated at each balance sheet
date (see Note 2). The Company also had restricted marketable securities of
$6,526,000 at December 31, 1998 supporting outstanding letters of credit (see
Note 14). At January 31, 2000, there were no restricted marketable securities.
35
Foreign Currency Translation and Hedging
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52 "Foreign Currency Translation". All balance sheet accounts have been
translated using the exchange rate in effect at the balance sheet date. Income
statement amounts have been translated using average exchange rates in effect
during the year. The gains and losses resulting from the changes in exchange
rates from year to year are insignificant for all years presented. Additionally,
the effect on the statements of operations for transaction gains and losses is
insignificant for all years presented.
At December 31, 1998, the Company had certain forward exchange contracts
(primarily British Pounds Sterling, German Marks, Italian Lira, French Francs,
and Swiss Francs) outstanding to hedge the economic exposure against currency
fluctuations affecting certain foreign assets and liabilities, which matured in
January 1999. The forward exchange contracts were not renewed after the January
1999 maturity.
Fair Value of Financial Instruments
The Company's cash equivalents, marketable securities, accounts
receivables, and foreign forward exchange contracts are carried at cost, which
approximates fair value.
Revenue Recognition
The Company derives its revenues from license fees with corporate,
government, OEM customers and channel-partners; software maintenance fees from
site-license agreements with corporate and government customers; royalties,
including initial nonrefundable royalties from license arrangements with OEMs
and channel-partners; and professional services fees for services provided to
licensees of our products.
Prior to December 31, 1997, the Company recognized revenue in accordance
with the American Institute of Certified Public Accountants' (AICPA) Statement
of Position (SOP) 91-1, "Software Revenue Recognition." In 1998, the Company
adopted Statement of Position 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition" issued by the American Institute of Certified
Public Accountants (SOP 97-2, as amended). The adoption of SOP 97-2, as amended,
did not have a material impact on the Company's financial position or results of
operations. Revenue from software license fees (excluding royalties) is
recognized when there is evidence of an arrangement for a fixed and determinable
fee that is probable of collection and the software has been delivered to the
customer. Royalty revenues are generally recognized in the Company's financial
statements in the quarter in which the amounts due to the Company have been
determined. Typically, the Company's software licenses do not include
significant post-delivery obligations to be fulfilled by the Company and
payments are due within a twelve month period from the date of delivery.
Consequently, license fee revenue is generally recognized upon shipment of the
technology. Revenue for maintenance agreements is recognized as income over the
term of the agreement using the straight-line method. Revenue from training,
consulting, and implementation services is recognized as services are performed.
Product Development Costs
Software and other costs incurred in connection with product development
are charged to expense until such time as specific product technological
feasibility has been established. Thereafter, product development costs
specific to the product are capitalized and reported at the lower of unamortized
cost or net realizable value.
Amortization of capitalized product development costs begins when the
related product is available for general release to customers. These costs are
amortized using the shorter of the estimated future product revenue streams or
the straight-line method over periods not exceeding three years.
Acquired developed software is capitalized as part of the allocation of the
purchase price on the basis of the estimated fair market value. Acquired
developed software is amortized on a straight-line basis over its estimated
useful life ranging from two to ten years.
36
Amortization of $6,456,000, $4,599,000, and $5,259,000 for the years ended
January 31, 2000 and December 31, 1998 and 1997, respectively, is included as a
component of cost of revenues. Amortization of $608,000 for the one month ended
January 31, 1999 is included as a component of cost of revenues.
Licensed Technology and Advances
Licensed technology and royalty advances, which pertain to payments by the
Company for the license of technology used in the Company's products, are stated
at cost less royalty amounts expensed based on revenues recognized over the life
of the related agreement. Costs of purchased licenses are amortized using the
greater of (a) the straight-line method over their estimated economic lives,
generally one to five years, or (b) current period revenue to anticipated total
revenues during the license period.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on
leasehold improvements using the straight-line method over the economic life of
the asset or the lease term, whichever is shorter. For property and equipment
acquired prior to December 31, 1997, depreciation is provided using an
accelerated method over the estimated economic life of the assets, generally
three to five years. The Company adopted the straight-line depreciation method
for all equipment placed in service on or after January 1, 1998. The equipment
under the straight-line method is being depreciated over the estimated useful
life of the assets, generally three to five years. Management of the Company
believes that the straight-line method of depreciation provides a preferable
matching between expected productivity and cost allocation since the equipment's
operating capacity and consumption generally remains consistent over time. The
change in depreciation methods was not material to operating results or the
financial position of the Company.
Intangible Assets
Intangible assets, including excess costs over net assets acquired, are
being amortized on a straight-line method over their estimated economic lives
for periods ranging from one to ten years. In accordance with the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", if
facts and circumstances suggest that an impairment may have occurred, the
unamortized balances of these assets are reviewed. Facts and circumstances
indicative of an impairment may include factors such as a significant decrease
in demand for a product related to an asset, a history of operating cash flow
losses, or a projection or forecast that demonstrates continuing losses
associated with a revenue producing asset. The undiscounted cash flow method is
used to determine if impairment has occurred. If indicators of impairment are
present, and the estimated undiscounted cash flows to be derived from the
related assets are not expected to be sufficient to recover the asset's carrying
amount, an impairment loss is charged to expense in the period identified. The
impairment loss is based upon the difference between the carrying amount and the
fair value, as determined based upon discounted cash flows. The rates that would
be utilized to discount the net cash flows to net present value would take into
account the time value of money and investment risk factors. In the fiscal year
ended January 31, 2000, certain of these intangible assets were determined to be
impaired, and the carrying amounts were reduced, as appropriate (see Notes 6 and
7).
37
Concentration of Credit Risk
In 1997, Microsoft Corporation accounted for 28% of the Company's revenues.
The economic terms of the Company's agreement with Microsoft with respect to
certain of the Company's linguistic products expired at the end of 1997, and
Microsoft Corporation accounted for less than 10% of the Company's revenues in
1998 and fiscal 2000. No other customer accounted for more than 10% of revenues
for the periods shown.
The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses.
The Company licenses its products primarily to customers in North America.
Revenues from foreign customers accounted for 33%, 24% and 21%, of total net
revenue for the years ended January 31, 2000 and December 31, 1998 and 1997,
respectively, primarily related to the Company's divested PDM division. No
foreign country accounted for more than 10% of total sales in any period.
Stock-Based Compensation
The Company has elected to account for its stock-based compensation plans
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations rather than the
alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, the Company does not generally recognize compensation
expense for its stock option plans and its stock purchase plan. However, in
fiscal 2000, in connection with the sale of its DynaText product line and PDM
division (see Note 5), the Company accelerated vesting of options held by
employees of the PDM division, which resulted in charges for compensation
expense in the amount of $1,744,000. The compensation expense is included in the
appropriate operating expense categories in the accompanying consolidated
statements of operations, based on the nature of services provided by the
various employees affected.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities" (collectively SFAS 133), which is effective for fiscal years
beginning after June 15, 2000. SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. We do not believe that the adoption of this standard will have a
material impact on our financial position or results of operations.
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-9 (SOP
98-9) "Modification of SOP 97-2, Software Revenue Recognition with respect to
Certain Transactions" effective for fiscal years beginning after March 15, 1999.
SOP 98-9 defines vendor specific objective evidence of fair value in connection
with software revenue recognition. The adoption of SOP 98-9 is not expected to
have a material impact on the Company's financial position or results of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Note 2. Available for Sale Investments
The Company's available-for-sale investments are carried at cost, which
approximates fair value, and are included in cash equivalents and marketable
securities. Following are the components of the available-for-sale investments:
38
January 31, December 31,
2000 1998
---- ----
(In thousands of dollars)
Commercial paper....................................................... $ 5,951 $ -
Corporate issues....................................................... 5,645 39,292
Money market funds..................................................... 15,552 1,437
United States agency bonds............................................. 996 3,013
Asset-backed securities................................................ - 8,926
------- -------
Total.................................................................. $28,144 $52,668
======= =======
Interest on securities classified as available-for-sale of $1,472,000,
$4,883,000 and $4,280,000 is included in net investment income in the years
ended January 31, 2000, and December 31, 1998 and 1997, respectively. Interest
on securities classified as available-for-sale of $332,000 is included in net
investment income in the one month ended January 31, 1999.
During the years ended January 31, 2000 and December 31, 1998 and 1997,
available-for-sale securities with values of $44,812,000, $144,464,000 and
$34,343,000, respectively, were sold. In the one month ended January 31, 1999,
available-for-sale securities with values of $7,977,000 were sold. The gross
realized gains and losses on those sales were immaterial to the Company's
financial statements. During the years ended January 31, 2000 and December 31,
1998 and 1997, purchases of available-for-sale securities were $41,420,000,
$385,154,000 and $313,661,000, respectively. In the one month ended January 31,
1999, purchases of available-for-sale securities were $2,986,000. Maturities of
available-for-sale securities were $29,947,000, $265,100,000 and $277,725,000
for the years ended January 31, 2000 and December 31, 1998 and 1997,
respectively. There were no maturities of available for sale securities in the
one month ended January 31, 1999.
The Company's available-for-sale securities have the following maturities:
January 31, December 31,
2000 1998
---- ----
(In thousands of dollars)
Due in one year or less.............................................. $27,161 $36,844
Due within two years................................................. 983 15,824
------- -------
Total................................................................ $28,144 $52,668
======= =======
Restricted available for sale securities at December 31, 1998 totaled
$6,526,000, and represented amounts held in support of irrevocable stand-by
letters of credit for certain performance guarantees under an international
distributor arrangement (see Note 14). On September 14, 1999, the Company
negotiated a release of the outstanding guarantee commitments. Under this
release, the Company paid the international reseller $606,000 from available
cash and cancelled the distribution agreement. Additionally, the stand-by
letters of credit were terminated, allowing the restriction on the marketable
securities to be lifted. There were no restricted securities as of January 31,
2000.
39
Note 3. Property and Equipment
Property and equipment are summarized as follows:
January 31, December 31,
2000 1998
---- ----
(In thousands of dollars)
Leasehold improvements.............................................. $ 1,561 $ 2,511
Computer equipment and software..................................... 16,148 20,579
Furniture and fixtures.............................................. 2,945 4,803
-------- --------
20,654 27,893
Less accumulated amortization and depreciation...................... (15,620) (18,028)
-------- --------
$ 5,034 $ 9,865
======== ========
Note 4. Acquisitions and Investments
AIS Software, S.A.
On January 12, 1999, the Company acquired AIS Software S.A. ("AIS
Software") from Berger-Levrault S.A., a French publisher, for approximately
$3,000,000 using available cash. AIS Software, based in Paris, France is the
developer of Balise, an SGML and XML transformation tool and scripting language,
as well as Dual Prism, a Web-based XML and SGML publishing system. The
acquisition was accounted for as a purchase and was included in the consolidated
financial statements from the date of acquisition until its disposition in
January 2000. The purchase price was allocated based on the estimated fair
market value of the assets acquired and the liabilities assumed. The
acquisition included the purchase of certain technology under research and
development, which resulted in a charge to the Company's consolidated results
for the one-month period ended January 31, 1999 of $500,000. Intangible assets
totaling $2,700,000 were recorded at the time of the acquisition and have been
amortized on a straight-line basis over their estimated useful lives, ranging
from two to five years. AIS Software operated as part of the Company's Product
Data Management Division until its divestiture on January 5, 2000 (see Note 5).
Venture Labs, Inc.
On December 22, 1998, the Company acquired all of the outstanding stock of
privately held Venture Labs, Inc. and its subsidiary Paradigm Development
Corporation (collectively "Paradigm") for a total value of $4,800,000. The
Company paid $4,300,000 in cash and assumed certain liabilities. Paradigm is the
developer of Java file filtering and viewing technology for both OEM and direct
corporate use. Paradigm operates as part of the Company's Information Exchange
Division. The acquisition was accounted for as a purchase and has been included
in the consolidated financial statements from the date of acquisition. The
purchase price was allocated based on the estimated fair market value of the
assets acquired and the liabilities assumed. The transaction included the
purchase of certain technology under research and development, which resulted in
a charge to the Company's fiscal 1998 consolidated fourth quarter results of
$1,800,000. Subsequent to the initial purchase price allocation, the Company
reevaluated certain receivables recorded in connection with the acquisition, and
reduced the outstanding balances by $328,000, with an offsetting adjustment to
goodwill. Subsequent to this adjustment, intangible assets totaling $1,594,000
were recorded in connection with the acquisition. In addition, the Company
negotiated noncompetition agreements with key executives for a total value of
$1,500,000. The intangible assets are being amortized on a straight-line basis
over their useful lives, ranging from one to five years.
Sherpa Systems Corporation
In December 1998, the Company acquired all of the outstanding stock of
privately held Sherpa Systems Corporation ("Sherpa"). Sherpa is a provider of
product data management solutions that manage mission-critical information
through the product lifecycle process of design, testing, manufacturing and
delivery. The acquisition was accounted for as a purchase and was included in
the consolidated financial statements from the date of acquisition until its
disposition. The preliminary purchase price allocation was based upon the
estimated fair value of the assets acquired and the liabilities assumed on the
date of purchase. These preliminary estimates were adjusted subsequent to the
initial recording, as detailed below. The acquisition included the purchase of
certain technology under research and
40
development, which resulted in a charge to the Company's fiscal 1998
consolidated fourth quarter results of $12,000,000. At the time of the
acquisition, the Company also caused Sherpa to enter into employment and non-
competition agreements with key executives, under which the Company agreed to
pay approximately $1,600,000 over a three year period. The Company paid
approximately $700,000 over the period Sherpa operated as part of the Company's
Product Data Management Division, from December 4, 1998 until its divestiture on
January 5, 2000 (see Note 5).
The total consideration paid at the time of the acquisition was
$36,000,000, consisting of $28,700,000 of cash and warrants ("Original
Warrants") to purchase 1,456,458 shares of the Company's common stock. The
Original Warrants, at the time of the acquisition, were valued at $5.00 per
warrant, or $7,282,000. The Original Warrants had a 24-month term and the right
to purchase shares of the Company's common stock at an exercise price of $23.50
per share.
Subsequent to the Company's announcement on February 1, 1999 that it would
restate its financial results (see Note 14), the Company began discussions with
the warrant holders to reprice the Original Warrants or exchange them for cash,
with the objective of meeting the intention under the original agreement. On
June 22, 1999, the Company entered into an agreement with the holders of the
Original Warrants that provided, among other things, a) for the cancellation of
all of the outstanding Original Warrants, b) the issuance of new warrants, with
a 36-month term and an exercise price of $10.00 per share, to purchase a
proportionate share of 1,000,000 shares of the Company's Common stock and c) the
payment of a proportionate share of $3,000,000 in cash. The new warrants were
valued at $2.01 per warrant. As a result of the agreement, the value of the
consideration paid by the Company for the Sherpa acquisition was reduced by
approximately $2,272,000, with an offsetting reduction to goodwill.
The acquisition also included estimated costs of approximately $5,800,000
for direct transaction costs and costs relating to the elimination of excess and
duplicative activities as a result of the merger. Since December 31, 1998,
payments against the accrual consisted of the following: approximately
$1,635,000 for employee severance for elimination of duplicate functions and
closure of duplicate and excess operations; approximately $400,000 for
professional fees consisting principally of appraisal, legal, and accounting
fees; and $39,000 for other out-of-pocket expenses related to the acquisition.
During fiscal 2000, the Company reevaluated the estimated costs and reduced the
related accrual and goodwill by approximately $3,629,000, primarily due to a
reduction in estimated costs to exit a long term, fixed fee professional service
agreement and reductions in estimated severance costs. As of January 31, 2000,
there was no remaining liability for such costs.
The preliminary purchase accounting included capitalized software and other
intangible assets totaling $30,385,000. After consideration of the above noted
adjustments, and in increase of $400,000 related to certain pre-acquisition
liabilities, intangible assets and capitalized software totaled $24,884,000, and
have been amortized on the straight-line basis over their estimated useful
lives, ranging from two to five years.
MediaBank
On August 28, 1998, the Company acquired the intellectual property and
certain other assets of Bitstream Inc.'s MediaBank media asset management system
and related technologies for $11,900,000 using available cash. The transaction
also included a license to Bitstream's Page Flex page composition technology for
an additional $600,000. The acquisition was accounted for as a purchase and has
been included in the consolidated financial statements from the date of
acquisition. The purchase price was allocated based on the estimated fair
market value of the assets acquired and the liabilities assumed. The
transaction included the purchase of certain technology under research and
development, which resulted in a charge to the Company's fiscal 1998
consolidated third quarter results of $7,500,000. Intangible assets totaling
$4,460,000 were recorded at the time of the acquisition, and are being amortized
on the straight-line basis over five years. MediaBank operates as part of the
Company's eBusiness Technologies Division.
41
ViewPort Development AB
On March 12, 1998, the Company acquired all of the outstanding capital
stock of privately held ViewPort Development AB for $2,500,000 using available
cash. ViewPort Development AB operated as part of the Company's Product Data
Management Division until its sale to Enigma on October 29, 1999 (see Note 5).
The acquisition was accounted for as a purchase and has been included in the
consolidated financial statements from the date of acquisition. The purchase
price was allocated based on the estimated fair market value of the assets
acquired and the liabilities assumed. The transaction included the purchase of
certain technology under research and development, which resulted in a charge to
the Company's fiscal 1998 consolidated first quarter results of $600,000.
Intangible assets of $1,830,000 recorded in connection with the acquisition are
being amortized over their estimated useful lives, ranging from one to five
years.
Henderson Software, Inc.
On November 24, 1997, the Company acquired all of the outstanding stock of
privately held Henderson Software, Inc. for $750,000 using available cash.
Henderson Software is a provider of Computer Graphics Metafile viewing and
filtering solutions. The transaction was accounted for as a purchase and has
been included in the consolidated financial statements since the date of
acquisition. The purchase price was allocated on the basis of the estimated
fair market value of the assets acquired and liabilities assumed. The
acquisition included the purchase of certain technology under research and
development, which resulted in a charge to the Company's consolidated results
for the quarter ended December 31, 1997 of $700,000. As part of a restructuring
activity in fiscal 2000, the operation of this subsidiary ceased (see Note 6).
Level Five Research, Inc.
On April 22, 1997, the Company acquired all of the outstanding capital
stock of privately held Level Five Research, Inc. from Information Builders,
Inc. for $5,000,000 using available cash. Level Five Research, Inc. operated as
Inso Florida Corporation prior to the sale of its assets to Lernout & Hauspie
Speech Products N.V. (see Note 5). Level Five Research, Inc. is a developer of
software and systems that apply intelligent technologies to data access
management. The acquisition was accounted for as a purchase and was included in
the consolidated financial statements from the date of acquisition to the date
of disposition. The purchase price was allocated on the basis of the estimated
fair market value of the assets acquired and liabilities assumed. The
acquisition included the purchase of certain technology under research and
development, which resulted in a charge to the Company's consolidated results
for the quarter ended June 30, 1997 of $3,600,000.
Mastersoft
On February 6, 1997, the Company acquired the intellectual property and
certain other assets of Adobe Systems Inc.'s document access and conversion
business, formerly known as Mastersoft, for $2,965,000 using available cash.
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended March 31, 1997 of
$1,800,000. Intangible assets of approximately $258,000 were recorded at the
time of the acquisition and are being amortized on a straight-line basis over
their estimated useful lives of five years. Mastersoft operates as a component
of the Company's IED division.
Proforma Results
Unaudited pro forma revenue, net loss, and loss per share shown below for
the year ended December 31, 1998 assumes the acquisitions of AIS Software, S.A.,
Venture Labs, Inc., Sherpa Systems Corporation, MediaBank and ViewPort
Development AB occurred on January 1, 1998. Therefore, the 1998 amounts
presented below reflect the write-off of certain purchased technology under
research and development of $500,000 relating to the acquisition of AIS
Software, S.A.
42
Year Ended
December 31, 1998
(unaudited)
-----------
(In thousands of dollars except per share amounts)
Revenue.................................................................................... $ 98,491
Net loss................................................................................... (39,116)
Loss per share............................................................................. $ (2.60)
Information Please LLC
On April 23, 1997, the Company entered into an agreement for the further
development and marketing of the Company's Information Please(R) Almanac Product
line, with Information Please LLC (the "Partnership"). The Company transferred
ownership of the Information Please brand and the intellectual properties that
comprise the almanac product line to the Partnership. In addition, some of the
Company's technical and editorial staff members became employees of the
Partnership. The Company retained a 19.8% ownership position in the new
venture. The Company historically has accounted for its investment in
Information Please LLC under the cost method. There was no gain or loss
recognized by the Company on the transfer of the assets to the Partnership.
In fiscal 2000, the Company determined that the value of its investment in
Information Please LLC was impaired. This assessment was based on the Company's
review of Information Please LLC's operating results and business plan and the
Company's anticipated future cash flows from its investment. Accordingly, the
investment was written down to its net realizable value, resulting in a charge
of $2,655,000 in the current fiscal year. This amount is reported as "Write-
down of investment in Information Please" in a separate line item in the
accompanying consolidated financial statements.
Note 5. Divestitures
Sale of DynaText
On October 29, 1999, the Company sold its DynaText/DynaWeb stand-alone
technical document publishing component of its PDM Division, along with its
ViewPort browser technology assets, for $14,750,000. The sale was in the form
of a stock purchase by Enigma Information System Ltd. and its subsidiary, Enigma
Information Retrieval Systems, Inc., (collectively "Enigma") of all of the
outstanding stock of Inso Providence Corporation and ViewPort Development AB. In
connection with the disposition, the Company retained the accounts receivable
directly associated with the DynaText/DynaWeb and ViewPort browser technologies.
The proceeds of the sale were $9,000,000 in cash and $5,750,000 in the form of a
promissory note, due and payable by April 30, 2000. The promissory note was
secured by a Stock Pledge Agreement of the stock of Inso Providence Corporation.
In connection with this transaction, the Company recorded direct transaction
costs and other accruals for costs directly associated with the sale. As a
result, the Company reported a gain of $14,549,000. The transaction created a
capital loss for federal tax purposes, which will be carried forward to future
periods.
On January 27, 2000 the Company and Enigma amended the terms of the
agreement and related promissory note. Enigma paid $4,500,000 in cash to the
Company and deposited $1,200,000 into an interest bearing escrow account. In
return, the Company released the security for the promissory note. The Company
expects that most of the $1,200,000 escrow will be received in the first half
of fiscal 2001, subject to certain adjustments.
Sale of PDM Division
On January 5, 2000, the Company sold the remaining interest in its PDM
Division to Structural Dynamics Research Corporation ("SDRC") for $6,000,000 in
cash plus assumption of liabilities. The transaction was in the form of a stock
purchase of all of the outstanding stock of the Company's subsidiaries Sherpa
Systems Corporation, and Inso France Development S.A. (formerly AIS Software,
S.A.). The proceeds received from the sale totaled $5,000,000 in cash at the
time of the closing, and $1,000,000 was placed in a supplemental closing fund to
be paid no later than 90 days after the first anniversary of the closing date.
The selling price is subject to adjustment based on the net worth of the
business at closing. The net worth of the business, as calculated on the closing
balance sheet, is expected to result in an additional payment to the Company of
approximately $4,000,000, which is anticipated to be received in the first half
of fiscal 2001. After direct transaction costs, the loss on the sale of PDM was
$2,337,000. The transaction created a capital loss for federal tax purposes,
which will be carried forward to future periods.
Sale of Linguistic Software Assets to Lernout & Hauspie
43
On April 23, 1998, the Company sold its linguistic software assets to
Lernout & Hauspie for $19,500,000, plus an additional amount for certain
receivables, net of certain liabilities. The proceeds were received 50% in cash
and 50% in the form of a note that was converted into shares of Lernout &
Hauspie common stock in June 1998. The Company sold the Lernout & Hauspie
common stock in June 1998. Lernout & Hauspie paid for the other net assets in
cash. Included in the assets transferred to Lernout & Hauspie were all of the
Company's linguistic software products, including its proofing tools, reference
works, and information management tools, the Quest database search technology,
and all customer and supplier agreements related to those products. In
connection with the sale, the Company recorded direct transaction costs; costs
to write-off capitalized software and other assets; estimated lease and facility
costs; and other accruals for costs directly associated with the sale. As a
result, the Company reported a gain of $13,289,000 in the year ended December
31, 1998.
Note 6. Restructuring Expenses
The Company incurred approximately $500,000 in the first quarter of fiscal
2000 relating to the closure of the Company's Kansas City location, primarily
for severance for 11 terminated employees. As of January 31, 2000, the entire
balance had been paid in full.
In July 1999, the Company adopted a plan of restructuring aimed at reducing
current operating costs, as well as supporting the Company's new divisional
structure. The Company's restructuring plan included a reduction of more than
20%, or 105 employees, including 10 executives or managers, from staff levels at
the end of 1998. The plan also included the closure and/or combination of
domestic and international sales and administrative facilities and the
abandonment of leasehold improvements and support assets associated with these
locations, which were removed from service shortly after the implementation of
the plan. The plan also called for a change in focus away from certain
products. As a result of the restructuring plan, the Company recorded an
initial charge of $6,234,000 to the fiscal 2000 results. Subsequent to the
initial recording, net adjustments totaling $156,000 were recorded, increasing
the charge to $6,390,000. The capitalized product development costs and
intangibles were written-down to fair values, determined based upon their
estimated future cash flows. The components of the charge, as well as the
Company's payments made against the accruals is detailed as follows:
Initial Adjust- Payments Accrual Balance
Charges ments Made January 31, 2000
------- ----- ---- ----------------
(In thousands of dollars)
Cash charges:
------------
Severance for administrative, sales and development
positions.................................................. $2,184 $188 $2,158 $214
Closure/combination of domestic and international
administrative and sales facilities........................ 957 (32) 733 192
------ ------- ------ ----
Subtotal.................................................... $3,141 $156 $2,891 $406
------ ------- ------ ----
Non-cash charges:
----------------
Write-downs of capitalized product development costs and
intangibles for certain discontinued products.............. 1,739 - - -
Write-downs of leasehold improvements and support assets
associated with closed locations........................... 1,354 - - -
------ ------- ------ ----
Total....................................................... $6,234 $156 $2,891 $406
====== ======= ====== ====
In October 1999, the Company adopted a plan of restructuring aimed at
reducing current operating costs at the Company's Product Data Management
("PDM") division. The restructuring plan included a PDM workforce reduction of
approximately 40%, or 51 employees, including 9 executives or managers. The plan
also included the consolidation of the PDM division's sales, service and support
organizations, the consolidation of PDM development facilities and the
abandonment of leasehold improvements and support assets associated with these
locations. The plan also called for a change in focus away from certain
development activities. Therefore, the charge included a write-down of licensed
technology for discontinued development activities to their fair values, based
upon their estimated future cash flows. As a result of the restructuring plan,
the Company recorded an initial charge of $4,290,000 to the fiscal 2000 results.
Subsequent to the initial recording, net adjustments totaling $92,000 were
recorded, reducing the charge to $4,198,000. Additionally, in connection with
evaluations made at the time of the restructuring, the Company recorded a
$10,000,000 charge for the write-down of certain PDM intangible assets and
capitalized software based on their estimated future
44
discounted cash flows. This charge was included in the special charges line in
the accompanying consolidated statements of operations (see Note 7). The
components of the restructuring charge, as well as the Company's payments made
against the accruals is detailed as follows:
Initial Adjust- Payments Accrual Balance
Charges ments Made January 31, 2000
------- ----- ---- ----------------
(In thousands of dollars)
Cash charges:
------------
Severance for administrative, sales and development
positions.................................................. $1,030 $ 366 $ 766 $630
Consolidation of facilities................................. 690 (200) 490 -
------ ----- ------ ----
Subtotal.................................................... $1,720 $ 166 $1,256 $630
------ ----- ------ ----
Non-cash charges:
----------------
Write-downs of licensed technology.......................... 1,923 - - -
Write-downs of support assets associated with closed
locations.................................................. 647 (258) - -
------ ----- ------ ----
Total....................................................... $4,290 $ (92) $1,256 $630
====== ===== ====== ====
In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and streamlining the
organization. The plan primarily affected certain Lexical and Linguistic
products of the Company. As a result of the restructuring plan, the Company
recorded $5,848,000 of expenses in the year ended December 31, 1997. The charge
included $320,000 of severance for 17 employees in development; $315,000 of
estimated lease obligations, net of estimated sublease income, for the impact of
affected leases; $3,353,000 for the write off of capitalized software and other
assets; and $1,860,000 for the write-off of prepaid royalties. Payments of
$360,000 and $275,000 were made against the accruals in the years ended
December 31, 1998 and 1997, respectively. Accordingly, accrued liabilities of $0
and $360,000 were remaining relating to this restructuring charge at
December 31, 1998 and 1997, respectively.
Note 7. Special Charges
For the year ended January 31, 2000, the Company incurred $28,103,000 of
special charges. Included in the special charges were $1,527,000 in
professional fees incurred in connection with the restatement of the Company's
results for the first nine months of 1998. These professional fees were for the
Company's investigation of the circumstances surrounding certain transactions
leading to the restatement and for the formal investigation initiated by the
Securities and Exchange Commission following the restatement. Also related to
the restatement were special charges for net premium costs and related
professional advisory fees for a major insurance carrier to assume financial
risk associated with the class action litigation initiated against the Company
in February 1999, as well as severance costs of certain employees who were
terminated or resigned. Additionally, approximately $10,805,000 of the special
charges related to the write-down of intangible assets and capitalized software
costs, substantially all attributable to the Company's PDM division, to their
estimated fair values, determined based upon estimated future cash flows. In
connection with the Company's restructure and subsequent plan to divest of the
PDM division, the intangible assets recorded at the time of acquisition were
reevaluated. In connection with the future plans and the anticipated future
cash flows of the business, the intangible assets were written down to their
estimated fair values, as determined from estimated proceeds to be received upon
a sale of the business. The components of the special charges, as well as the
Company's payments made against the accruals is detailed as follows:
Charges Payments Accrual Balance
incurred Made January 31, 2000
-------- ---- -----------------
(In thousands of dollars)
Cash charges:
-------------
Professional fees associated with restatement of 1998 results,
lawsuits and SEC investigation................................... $ 1,527 $ 1,027 $ 500
Net insurance premiums and other costs related to class action
litigation initiated against the Company in February 1999........ 13,451 12,451 1,000
Severance for certain executive, management and other staff....... 2,320 1,248 1,072
------- ------- ------
Subtotal.......................................................... $17,298 $14,726 $2,572
------- ------- ------
45
Non-cash charges:
----------------
Write-downs of capitalized product development costs and
intangibles for certain impaired products........................ 10,805 - -
------- ------- ------
Total............................................................. $28,103 $14,726 $2,572
======= ======= ======
Note 8. Income Taxes
Pre-tax income (loss) from continuing operations is taxed in the following
jurisdictions:
One Month
Year Ended Ended
January 31, January 31, Years Ended December 31,
2000 1999 1998 1997
---- ---- ---- ----
Domestic.......................................... $(56,192) $(7,633) $(18,051) $2,425
Foreign........................................... (5,644) (1,058) (2,553) 79
-------- ------- -------- ------
Total............................................. $(61,836) $(8,691) $(20,604) $2,504
======== ======= ======== ======
The provision (benefit) for income taxes comprised the following:
One Month
Year Ended Ended
January 31, January 31, Years Ended December 31,
2000 1999 1998 1997
---- ---- ---- ----
Current:
Federal........................................... $ - $ - $ (1,203) $1,206
Foreign........................................... 390 - 90 263
State............................................. 84 - 148 274
-------- ------- -------- ------
Total current.................................. 474 - (965) 1,743
-------- ------- -------- ------
Deferred:
Federal........................................... - - (843) 1,167
State............................................. - - 773 34
-------- ------- -------- ------
Total deferred................................. - - (70) 1,201
-------- ------- -------- ------
Total provision (benefit).......................... $ 474 $ - $ (1,035) $2,944
======== ======= ======== ======
46
A reconciliation of income tax (benefit) expense to the statutory federal
income tax rate was as follows:
One Month
Year Ended Ended January
January 31, 31, Years Ended December 31,
2000 1999 1998 1997
---- ---- ---- ----
(In thousand of dollars)
Federal statutory rate................................ $(21,024) $(2,954) $(7,005) $ 851
State income taxes, net of federal effect............. (589) (100) 608 103
Change in valuation allowance......................... 32,938 2,809 493 (340)
Purchased in-process research and development......... - 170 4,692 -
Income tax accruals................................... - - - 1,575
Amortization of intangible assets acquired through
stock purchase....................................... 2,077 86 712 696
Tax basis in excess of book basis on the sales of
the PDM division..................................... (15,708) - - -
Unbenefited losses.................................... 2,273 - - -
Foreign taxes......................................... 390 - - -
Other................................................. 117 (11) (535) 59
-------- ------- ------- ------
Total................................................. $ 474 $ - $(1,035) $2,944
======== ======= ======= ======
Significant components of the Company's net deferred income tax
assets (liabilities) were as follows:
As of January 31, As of December 31,
2000 1998
---- ----
(In thousands of dollars)
Deferred tax assets:
Net operating loss carryforwards and tax credits............. $ 22,116 $ 9,335
Capital loss carryforwards................................... 15,470 -
Intangible assets............................................ 4,680 -
Accrued liabilities not currently deductible for tax......... 3,613 3,940
Compensation expense......................................... 97 1,678
Depreciation expense......................................... 452 1,353
Bad debt reserve............................................. 1,019 1,110
Deferred state taxes......................................... 1,068 -
Other........................................................ 699 -
Valuation allowance.......................................... (46,339) (9,901)
-------- -------
2,875 7,515
-------- -------
Deferred tax liabilities:
Deferred income.............................................. 444 2,094
Capitalized development costs................................ 2,431 5,194
Intangible assets............................................ - 165
Deferred state taxes......................................... - 62
-------- -------
2,875 7,515
-------- -------
Net deferred income taxes.................................... $ - $ -
======== =======
The valuation allowance of $46,339,000 (which includes net operating losses
and other deductions subject to limitations in future years) and $9,901,000 at
January 31, 2000 and December 31, 1998, respectively, was determined after
evaluating the Company's historical operating results and anticipated
performance over its normal planning horizon. The Company periodically
evaluates the valuation allowance and makes adjustments to the extent that
actual and anticipated operating results vary from those initially estimated at
the time the valuation allowance was established. At January 31, 2000, a
valuation allowance has been recorded due to the uncertainty associated with the
recoverability of the Company's
47
net deferred tax assets. The valuation allowance increased by approximately
$36,000,000 during fiscal year 2000, primarily due to net operating loss
carryforwards and capital loss carryforwards related to the two transactions
that accounted for the divestiture of the PDM division. During 1998, the Company
reduced its valuation allowance by approximately $4,388,000 by adjusting
goodwill that had been recorded in connection with the Company's 1998
acquisitions. This reduction of the valuation allowance was made as a result of
the recognition of deferred tax assets to the extent of certain deferred tax
liabilities recorded in connection with the 1998 acquisitions.
The Company has available net operating loss carryforwards and other tax
credits totaling approximately $64,500,000, which expire in the fiscal years
fiscal 2010 to 2020. Capital loss carryforwards of approximately $45,500,000 are
also available to the Company, as a result of the two transactions which
accounted for the divestiture of the PDM division. These loss carryforwards
expire in fiscal 2005. Because of acquisitions the Company has consummated and
due to certain provisions of the Internal Revenue Code concerning changes in
ownership, the use of the Company's net operating loss carryforwards may be
limited.
As a result of the exercise of non-qualified stock options during the year,
any future benefit recognized for the deduction will be charged directly to
equity.
Note 9. Transactions with Houghton Mifflin
The Company and Houghton Mifflin had various license agreements (the
"License Agreements") for the purpose of licensing certain database content from
published reference products of Houghton Mifflin's Trade and Reference Division
for use in certain of the Company's products. Included in the Company's cost of
revenues for the years ended December 31, 1998 and 1997, were royalties to
Houghton Mifflin for the licensing of this database content amounting to
approximately $300,000 and $1,234,000, respectively. The terms of the License
Agreements were substantially the same as those in effect while the Company
operated as a division of Houghton Mifflin, except that the minimum royalty for
certain licenses of reference work content was increased to 15% from 10% only
with respect to new OEM licenses entered into after January 1, 1994.
There were no transactions with Houghton Mifflin in the fiscal year ended
January 31, 2000 or in the one month ended January 31, 1999.
Note 10. Common Stock
On July 11, 1997, the Board of Directors adopted a Shareholders' Rights
Plan and declared a dividend distribution of one preferred stock purchase right
(a "Right") for each outstanding share of the Company's Common Stock to
stockholders of record at the close of business on July 24, 1997 (the "Record
Date"). Each Right entitles the registered holder to purchase from the Company a
unit consisting of one one-thousandth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, $0.01 par value per share (the "Preferred
Stock"), at a purchase price of $145 in cash per Unit (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of July 11, 1997, as amended in Amendment Number 1
to the Rights Agreement, dated October 27, 1999 (the "Rights Agreement"),
between the Company and State Street Bank & Trust Company, as Rights Agent.
The Rights will become exercisable after a person or group has acquired or
obtained the right to acquire beneficial ownership of 20% or more of the
outstanding common stock, or following the commencement of a tender or exchange
offer that would result in a person or group owning 30% or more of the shares of
common stock. Generally, if any person becomes the beneficial owner of 20% or
more of the shares of Common Stock of the Company, except pursuant to a tender
or exchange offer for all shares at a fair price as determined by the outside
Board members, each Right not owned by the 20% or more stockholder will enable
its holder to purchase that number of shares of the Company's Common Stock, in
lieu of preferred stock, which equals the exercise price of the Right divided by
one-half of the current market price of such Common Stock at the date of the
occurrence of the event. In addition, if the Company is involved in a merger or
other business combination transaction with another person or group in which it
is not the surviving corporation or in connection with which its Common Stock is
changed or converted, or it sells or transfers 50% or more of it assets or
earning power to another person, each Right that has not previously been
exercised will entitle its holder to purchase that number of shares of Common
Stock of such other person which equals the exercise price of the Right divided
by one-half of the current market price of such Common Stock at the date of the
occurrence of the event. In general, the Company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right, payable in cash, in
shares of common stock, or in any other form of consideration or any combination
of the foregoing deemed appropriate by the Board of Directors, at any time prior
to the earlier of (1) the tenth day after a public announcement that a person or
group has acquired, or obtained the right to acquire, 20% or more of the
outstanding common stock, or (2) the tenth day
48
following the commencement of a tender offer or exchange offer that would result
in a person or group owning 30% or more of the outstanding common stock. The
Rights will expire in July 2007.
Note 11. Earnings Per Share
Earnings per share is calculated based upon the weighted average number of
common shares outstanding for each period presented. The following table
provides the weighted average number of common shares outstanding during each
period for basic and diluted earnings (loss) per share and the potentially
dilutive securities outstanding for the periods.
One Month
Year Ended Ended January
January 31, 31, Years Ended December 31,
2000 1999 1998 1997
---- ---- ---- ----
Weighted average shares outstanding, basic......... 15,668,000 15,506,000 15,062,000 14,362,000
Stock options outstanding.......................... 4,831,581 4,361,031 4,471,023 3,873,666
Warrants outstanding............................... 965,356 1,456,458 1,456,458 -
The outstanding stock options and warrants have been excluded from the
computation of diluted earnings per share for the periods presented, because the
effect would be anti-dilutive.
Note 12. Stock Compensation Plans
Stock Incentive Plans
The Company has reserved 3,000,000 shares for issuance under the 1993 Stock
Incentive Plan ("1993 Plan") and 5,000,000 shares for issuance under the 1996
Stock Incentive Plan, as amended ("1996 Plan"). The 1993 Plan and the 1996 Plan
("the Plans") provide for the issuance of incentive stock options, non-qualified
stock options, unrestricted stock, restricted stock, and performance share
awards. Under the Plans, both incentive options and non-qualified options may be
granted to employees and consultants. The option exercise price shall not be
less than 100% of the fair market value of the shares on the date of grant in
the case of incentive options and not less than 85% of the fair market value of
the shares on the date of grant in the case of non-qualified options. The Plans
also provide for the grant of performance share awards to employees, entitling
the recipient to receive shares of common stock based upon achievement of
individual or Company performance goals. The term of each option and the vesting
periods for options and stock awards is fixed by the Compensation Committee of
the Company's Board of Directors. The term for incentive stock option grants may
not exceed 10 years from the date of grant. Options granted to purchase common
stock and restricted stock awarded under the Plans become fully vested and
exercisable in full upon a change in control, whether or not vested or
exercisable in accordance with their terms.
The Company's 1996 Non-employee Director Plan, as amended ("Director Plan")
provides for the automatic grant of non-qualified stock options and unrestricted
stock to members of the Board of Directors who are not employees of the Company.
The Company has reserved 415,000 shares for issuance under the Director Plan.
The Director Plan currently provides for an initial grant of options to each
Non-employee Director to purchase 20,000 shares of Common Stock at the fair
market value on the date that such Non-employee Director first becomes a
director of the Company; an annual grant of a non-qualified stock option to
purchase 5,000 shares of Common Stock at the fair market value on the date of
the Corporation's annual meeting; and an award of 1,000 shares of the Company's
unrestricted stock on January 27 of each year. The term for the option grants
may not exceed 10 years from the date of grant. Options granted to purchase
common stock and restricted stock awarded under the Director Plan become fully
vested and exercisable in full upon a change in control, whether or not vested
or exercisable in accordance with their terms. On February 15, 2000, the Board
of Directors of the Company voted to recommend to the shareholders that the
Director Plan be amended, retroactive to February 1, 2000, to (i) reduce the
initial option grant to new directors to 7,500, but to have such initial grant
vest immediately, (ii) increase the number of options to be granted annually
(the "Annual Option Grant") to Non-employee Directors to 7,500 and to have such
options vest immediately, (iii) set the date of January 27 as the date upon
which the Annual Option Grant will be made, (iv) eliminate the option to receive
stock in lieu of director fees, and (v) eliminate the annual stock award in its
entirety. The Board of Directors' recommended changes to the Director Plan will
be voted on by the shareholders at the Company's June 1, 2000 Annual Meeting.
The Board of Directors also voted, effective February 1, 2000, to reduce the
fees payable to Non-employee Directors for attendance both at meetings of
Committees
49
and those of the full Board of Directors to $2,500 per quarter, up to a maximum
of $10,000 in the aggregate per year, provided that the aggregate amount payable
may be increased by resolution of the Board of Directors if, in the Board's
determination, the number of meetings for which attendance is required in any
12 months is extraordinary.
On August 6, 1997, the Board of Directors approved a stock option exchange
program (the "Exchange Program") pursuant to which full-time permanent employees
holding stock options under the Plans were given the opportunity to exchange the
unexercised portion of such options (the "Existing Options") under the Plans for
new options (the "New Options") on a basis of four shares of common stock for
every five shares covered by the Existing Options. As a result of the Exchange
Program, eligible employees surrendered options for approximately 528,000
shares. The exercise price of the New Options was equal to the market value of
the Company's common stock on the date of grant, or $12.00. Additionally,
certain officers were eligible to participate in the Exchange Program for an
exercise price of $18.00. The New Options have the same contractual life,
vesting schedule, and other terms as the Existing Options canceled in exchange
thereof. Additionally, during the exchange program, certain employees exchanged
non-qualified options for incentive stock options covering 835,000 shares. The
then Non-executive Directors were excluded from the Exchange Program.
Notes Receivable from Stock Purchase Agreements
As of January 31, 2000, and December 31, 1998, the Company holds notes
receivable for a total of $200,000 and $1,305,000, respectively, from certain of
its corporate officers. The Company provided financing in 1997 to effect the
purchase of an aggregate 243,291 shares of the Company's common stock, pursuant
to the 1996 Stock Incentive Plan, at the fair market value on December 16, 1997,
of $10.25 per share. Interest on such loans accrues at 6.0% per annum until
maturity. The principal and interest amounts of such loans are repayable in full
upon the earlier of (i) the fifth anniversary of the loan, (ii) the date the
officer leaves the Company, or (iii) if and to the extent that the officer sells
the stock. These loans, which are shown as a reduction to stockholders' equity
on the balance sheet, are secured by the common stock purchased.
50
The following table summarizes the stock option activity under the 1993
Plan, the 1996 Plan, and the Director Plan:
Weighted
Available Options Average
for Grant Outstanding Price
--------- ----------- -----
At December 31, 1996.................................................... 970,850 4,025,964 $31.30
1997
Granted................................................................. (1,030,100) 1,030,100 $12.56
Exercised............................................................... (62,500) $10.27
Forfeited............................................................... 592,098 (592,098) $31.56
Shares issued in connection with Notes Receivable from Stock Purchase
Agreements............................................................. (243,291) $10.25
Shares forfeited from Exchange Program.................................. 527,800 (527,800) $35.11
Unrestricted stock grant................................................ (8,000) $39.63
---------- ---------- ------
At December 31, 1997.................................................... 809,357 3,873,666 $15.20
1998
Additional authorized................................................... 3,165,000
Granted................................................................. (1,952,886) 1,952,886 $15.78
Exercised............................................................... (716,330) $11.99
Forfeited............................................................... 639,199 (639,199) $17.42
Restricted stock grant.................................................. (7,500) $17.95
Unrestricted stock grant................................................ (9,000) $13.56
---------- ---------- ------
At December 31, 1998.................................................... 2,644,170 4,471,023 $15.65
1999 (one month)
Exercised............................................................... (200) $12.00
Forfeited............................................................... 109,792 (109,792) $20.21
Unrestricted stock grant................................................ (9,000) $25.00
---------- ---------- ------
At January 31, 1999..................................................... 2,744,962 4,361,031 $15.54
2000
Granted................................................................. (3,490,300) 3,490,300 $ 7.86
Exercised............................................................... (851,466) $11.88
Forfeited............................................................... 2,168,284 (2,168,284) $13.73
Unrestricted stock grant................................................ (6,000) $41.00
---------- ---------- ------
At January 31, 2000..................................................... 1,416,946 4,831,581 $11.04
========== ========== ======
Related information for options outstanding and exercisable as of January
31, 2000 under the Plans is as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Ranges of Exercise Prices Shares Life Price Shares Price
- ------------------------- ------ ---- ----- ------ -----
$ 4.50-$6.94........................................ 2,005,100 9.4 $ 5.77 30,600 $ 6.02
$7.50-$11.75........................................ 1,225,622 8.6 9.75 319,997 9.50
$12.00-$15.69....................................... 689,505 7.3 12.41 192,828 12.16
$16.81-$29.50....................................... 714,754 6.2 18.58 255,447 18.44
$31.00-$54.25....................................... 196,600 8.0 40.67 93,900 47.51
--------- -------
Total........................................... 4,831,581 8.4 $11.04 892,772 $16.51
========= =======
The market value of the restricted shares awarded has been recorded as
unearned compensation and is shown as a separate component of stockholders'
equity. Unearned compensation is being amortized to expense over the vesting
periods that range from one to five years. Amortization totaled $79,000,
$259,000 and $194,000, for the years ending January 31, 2000 and December 31,
1998 and 1997, respectively. Amortization totaled $14,000 for the one month
ended January 31, 1999.
51
Stock Purchase Plan
Under the Company's 1993 Stock Purchase Plan, employees have the
opportunity to purchase the Company's common stock. The price at which the
employee may purchase the common stock is 85% of the last reported sale price of
the Company's common stock on the Nasdaq National Market on the date the
offering period commences or concludes, whichever is lower when rounded to the
next highest sixteenth percentage. Offerings begin on June 1 and December 1 of
each year and conclude on May 31 and November 30. During 1998, offerings began
on January 1 and July 1 and concluded June 30 and November 30. Offerings prior
to 1998 began on January 1 and July 1 of each year and concluded on June 30 and
December 31, respectively. A total of 450,000 shares of common stock have been
reserved under this plan, following the 1998 authorization of an additional
250,000 shares.
Employees purchased 184,323, 128,199 and 43,912 shares under the plan, in
fiscal 2000 and calendar 1998 and 1997, respectively, generating proceeds to the
Company of $1,078,000, $1,355,000 and $998,000 in each of the three years,
respectively. At January 31, 2000, 33,289 common shares remained available for
issuance under the stock purchase plan.
On February 14, 2000, the Board of Directors voted to recommend to the
stockholders that the number of shares of common stock reserved under the plan
be increased by 250,000, to 700,000. This recommendation will be voted upon by
the stockholders at the Company's June 1, 2000 Annual Meeting.
Fair Value
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock plans based on the fair value method provided under SFAS 123. The
fair value for the options described below was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for awards granted in fiscal 2000 and calendar 1998 and 1997. There
were no grants in the one month ended January 31, 1999.
2000 1998 1997
---- ---- ----
Risk-free interest rate..................................................... 5.37% 5.05% 5.95%
Expected life............................................................... 3.0 years 3.7 years 4.3 years
Expected volatility......................................................... 99% 66% 66%
Expected dividends.......................................................... 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restriction
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The total value of the awards granted during the years ended January 31,
2000 and December 31, 1998 and 1997, were computed as approximately $13,856,000,
$16,005,000 and $6,780,000, respectively, which would be amortized over the
vesting period of the options. As a result of the phase-in period allowed under
SFAS 123, the effects on reported net income for fiscal 2000 and calendar 1998
and 1997 will not likely be representative of the effects in future years. The
weighted average fair value of awards granted in fiscal 2000 and calendar 1998
and 1997 was estimated to be $4.62, $8.09 and $6.58, respectively. If the
Company had accounted for these awards in accordance with fair value accounting
proscribed under SFAS 123, the Company's pro forma net loss and loss per share
would have been as follows:
52
Year Ended
January 31, Years Ended December 31,
2000 1998 1997
---- ---- ----
(In thousands of dollars, except per share amounts)
Pro forma net loss................................................... $(75,146) $(28,380) $(5,598)
Pro forma loss per share............................................. $ (4.80) $ (1.88) $ (0.39)
Note 13. Benefit Plan
The Company has a 401(k)-retirement savings plan ("401(k) Plan"), covering
substantially all of the Company's domestic employees. Eligible employees are
permitted to make pre-tax contributions, up to 15% of their compensation subject
to an annual limit. Under the 401(k) Plan, the Company may make contributions
either in cash or common stock of the Company at the discretion of the Company's
Board of Directors. The Company has authorized 100,000 shares for issuance
under the Plan. The contribution may match in whole or in part the salary
deferral contributions of the participants and/or represent additional profit-
sharing contributions tied to the Company's net income performance. During the
years ended January 31, 2000 and December 31, 1998 and 1997, the Company's total
matching contribution amounted to approximately $1,137,000, $873,000 and
$824,000, respectively. During the one month ended January 31, 1999, the
Company's matching contribution amounted to $142,000. All of the Company
matching contributions have been made in the form of cash, for all periods
presented.
Note 14. Commitments and Contingencies
Leases
The Company has various lease agreements for office space and certain
equipment under operating leases that expire between 2002 and 2007. The
Company's office space leases include certain renewal and expansion options,
escalation clauses for the Company's proportionate share of increases in
building maintenance costs, and periods of free rent. During fiscal 2000, in
connection with the restructuring (see Note 6), the Company commenced
negotiations with the landlord of its corporate offices in Boston, to reduce the
size and location of the office space under lease. On March 3, 2000, the
Company and the landlord reached an agreement, which terminated the existing
leases and provided for a new lease for a smaller space, effective May 1, 2000.
The reduction in annual rental payments approximates $700,000 per year.
At January 31, 2000, after consideration of the amended lease arrangement,
future minimum lease commitments for non-cancelable leases are as follows
(in thousands of dollars):
2001................................................................ $1,601
2002................................................................ 1,455
2003................................................................ 1,445
2004................................................................ 1,367
2005................................................................ 1,474
Thereafter.......................................................... 2,677
Rent expense was approximately $3,473,000, $3,251,000 and $2,732,000, for
the years ended January 31, 2000 and December 31, 1998 and 1997, respectively.
Rent expense was approximately $404,000 for the one month ended January 31,
1999.
Capital Lease Obligations
The Company leases certain machinery and equipment under a capital lease,
which is secured by the equipment acquired. As of January 31, 2000, scheduled
future minimum payments approximate $93,000 in both fiscal 2001 and 2002 and
$61,000 in fiscal 2003. Of the total future minimum payments of $247,000,
approximately $30,000 represents interest charges. Net of interest charges,
the current portion of future minimum payments is $75,000, and the long term
portion is $142,000.
53
Equipment subject to capital leases totaled $243,000 and accumulated
depreciation on the leased equipment totaled $40,000 at January 31, 2000.
Commitments under Distributor Agreement
During 1998, the Company entered into a distribution agreement with an
international distributor that provided the distributor with guaranteed levels
of net receipts, as defined by the agreement, for specified geographic areas
(primarily Australia, New Zealand, and certain countries in the Far East), of
$2,000,000 for each calendar year ended December 31, 1999 and 2000. As of
December 31, 1998, management believed that the distributor would not be able to
achieve the defined level of net receipts from the agreement territory in either
year. Therefore, the Company recorded a charge to sales and marketing expense of
$4,000,000. This obligation is included in accrued liabilities on the
accompanying balance sheet for 1998. The Company had outstanding irrevocable
stand-by letters of credit with terms of one to two years totaling $4,004,000 at
December 31, 1998 supporting this guarantee. The Company had restricted
marketable securities totaling $6,526,000 at December 31, 1998 supporting the
letters of credit.
On September 14, 1999, the Company negotiated a release of the outstanding
commitments with the international distributor. Under this release, the Company
paid the international distributor $606,000 from available cash and cancelled
the distribution agreement. Additionally, the stand-by letters of credit were
terminated, allowing the restriction on the marketable securities to be lifted.
Furthermore, as a result of the release, the Company took a credit to sales and
marketing expenses in the third quarter of fiscal 2000 of approximately
$3,093,000 for expenses that were recorded in 1998. Finally, a separate cash
payment of approximately $3,200,000 paid to the Company in January 1999 under a
cancelled purchase order, was repaid to the international distributor at the
time of execution of the release of the 1998 distribution agreement.
Pending Litigation
During February 1999, certain shareholders of Inso filed seven putative
class action lawsuits against Inso and certain of Inso's officers and employees
in the United States District Court for the District of Massachusetts. The
lawsuits were captioned as follows: Michael Abramsky v. Inso Corporation, et
al., Civ. Action No. 99-10193; Richard B. Dannenberg v. Inso Corporation, et
al., Civ. Action No. 99-10195; Jack Smith v. Inso Corporation et al., Civ.
Action No. 99-10208; Chavy Weisz v. Inso Corporation, et al., Civ. Action No.
99-10200; Robert C. Krauser v. Inso Corporation, et al., Civ. Action No. 99-
10366; Jean-Marie Larcheveque v. Inso Corporation, et al., Civ. Action No. 99-
10299; and Thomas C. McGrath v. Inso Corporation, et al., Civ. Action No. 99-
10389. These lawsuits were filed following our announcement on February 1, 1999
that we planned to restate our revenues for the first three quarters of 1998.
Each of the complaints asserted claims for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission, as well as a claim for violation of Section 20(a) of the Exchange
Act. On April 5, 1999, the seven class action lawsuits that were filed against
us were consolidated into one lawsuit entitled In Re Inso Corporation, Civil
Action No. 99-10193-WGY.
The plaintiffs allege that the defendants prepared and issued deceptive and
materially false and misleading statements to the investing public. They seek
unspecified damages. We believe the claims are subject to meritorious
defenses, which we plan to assert during the lawsuit. On September 29, 1999, we
entered into an insurance agreement with a major AAA-rated insurance carrier
pursuant to which the insurance carrier assumed complete financial responsibly
for the defense and ultimate resolution of the lawsuit. A net charge to our
fiscal year 2000 consolidated results of $13,451,000 was taken in connection
with the insurance agreement.
As soon as we discovered that it could be necessary to restate certain of
our financial results for the first three quarters of 1998, we immediately and
voluntarily provided this information to the U.S. Securities and Exchange
Commission. On June 2, 1999, we were informed that the U.S. Securities and
Exchange Commission had issued a Formal Order of Private Investigation in
connection with matters relating to Inso's previously announced restatement of
its 1998 financial results. We cannot predict the ultimate resolution of this
action at this time, and there can be no assurance that the Formal Order of
Private Investigation will not have a material adverse impact on our financial
condition and results of operations.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and
Microlytics Technology Co., Inc. (together "Microlytics") filed a complaint
against Inso in the United States Bankruptcy Court for the Western District of
New
54
York. The lawsuit is captioned Microlytics, Inc. and Microlytics Technology Co.,
Inc. v. Inso Corporation, Adversary Proceeding No. 99-2177. The complaint seeks
turnover of purported property of the estates and damages for Inso's alleged
breaches of a license from Microlytics relating to certain computer software
databases and other information. The complaint seeks damages of at least
$11,750,000. On August 19, 1999, we filed our Answer and Demand for Jury Trial.
Also, on August 19, 1999, we filed a motion to withdraw the case from the
Bankruptcy Court to the United States District Court for the Western District of
New York. On December 15, 1999, the United States District Court granted our
motion for the purposes of dispositive motions and trial. We believe that the
claims are subject to meritorious defenses, which we plan to assert during the
lawsuit. We cannot predict the ultimate resolution of this action at this time,
and there can be no assurance that the litigation will not have a material
adverse impact on our financial condition and results of operations.
During February 2000, certain shareholders of Inso filed two putative class
action lawsuits against Inso and certain of Inso's officers and employees in the
United States District Court for the District of Massachusetts. The lawsuits
are captioned as follows: Liz Lindawati, et al. v. Inso Corp., et al., Civil
Action No. 00-CV-10305GAO; Group One Limited, et al. v. Inso Corp., et al.,
Civil Action No. 00-CV-10318GAO. These lawsuits were filed following our
preliminary disclosure of revenues for the fiscal year 2000 fourth quarter on
February 1, 2000. Both complaints assert claims for violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission, as well as a claim for violation of Section 20(a) of the
Exchange Act. The plaintiffs allege that the defendants prepared and issued
deceptive and materially false and misleading statements to the investing
public. They seek unspecified damages. We believe that the claims are subject
to meritorious defenses, which we plan to assert during the lawsuit. We cannot
predict the ultimate resolution of these actions at this time, and there can be
no assurance that the litigation will not have a material adverse impact on our
financial condition and results of operations.
Note 15. Operations by Industry Segment and Geographic Area
In the second quarter of fiscal 2000, the Company announced the
implementation of a new divisional structure, which resulted in the
decentralization of certain administrative and sales functions to improve the
customer focus of the Company. This action was implemented in the second
quarter of fiscal 2000. As a result, the Company was restructured into the
following operating segments: Product Data Management ("PDM"), eBusiness
Technologies ("eBT"), and Information Exchange ("IED"). A fourth operating
segment, Lexical and Linguistic, was sold to Lernout & Hauspie Speech Products
N.V. in April 1998 (see Note 5). As such, all prior period segment data has been
recast to reflect the new division structure. Each of the identified operating
segments disclosed represent the divisions for which the Company manages.
The PDM segment information below for all periods presented includes the
operations of the DynaText/DynaWeb and ViewPort browser technologies sold to
Enigma on October 29, 1999 (see Note 5). The balance of the PDM division was
sold effective January 5, 2000 (see Note 5).
Each segment's profit and loss for the years ended January 31, 2000 and
December 31, 1998, reflects all income and losses, except for the items shown in
the reconciliation information below. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
55
Segment Disclosure
Year Ended January 31, 2000
---------------------------
eBT IED PDM Totals
-------------- ------------- ------------- --------------
(In thousands of dollars)
Revenues from external customers..................... $ 12,329 $26,255 $ 26,096 $ 64,680
Depreciation and amortization expense................ 4,245 3,760 6,589 14,594
Segment profit (loss)................................ (16,679) 6,263 (12,997) (23,413)
Segment assets....................................... 15,038 17,631 - 32,669
Year Ended December 31, 1998
----------------------------
Lexical
and
eBT IED PDM Linguistic Totals
------------ --------- ---------- ---------- ---------
(In thousands of dollars)
Revenues from external customers................. $ 9,935 $28,633 $14,551 $6,975 $60,094
Depreciation and amortization expense............ 1,477 3,154 4,580 494 9,705
Segment profit (loss)............................ (2,111) 7,922 (7,499) 3,608 1,920
Segment assets................................... 15,019 26,272 51,291 - 92,582
Year Ended December 31, 1997
----------------------------
Lexical
and
eBT IED PDM Linguistic Totals
------------ --------- ----------- ---------- ---------
(In thousands of dollars)
Revenues from external customers................ $ 324 $31,362 $16,117 $34,066 $81,869
Depreciation and amortization expense........... 486 2,873 3,237 2,303 8,899
Segment profit (loss)........................... (2,158) 13,049 (6,549) 14,713 19,055
Segment assets.................................. 1,719 36,796 11,250 14,101 63,866
Enterprise-Wide Disclosures
Geographic Information
2000 1998 1997
------- ------- -------
Revenues: (In thousands of dollars)
United States..................................................................... $43,482 $45,696 $64,790
Foreign countries................................................................. 21,198 14,398 17,079
------- ------- -------
Consolidated Total................................................................ $64,680 $60,094 $81,869
======= ======= =======
Revenues are attributed to countries based on the location of the customer.
As of January 31, 2000, and December 31, 1998, the Company's long-lived
assets were primarily located in the Company's United States operations. The
long-lived assets located in foreign countries were less than 5% of consolidated
assets.
56
Reconciliation Information
Profit or loss
2000 1998 1997
-------- -------- -------
(In thousands of dollars)
Total external profit or loss for reportable segments.......................... $(23,413) $ 1,920 $19,055
Purchased in-process research and development.................................. - (21,900) (6,100)
Restructuring expenses......................................................... (11,068) - (5,848)
Special charges................................................................ (28,103) - -
Gain on sale of assets......................................................... 12,212 13,289 -
Net investment income.......................................................... 1,721 4,682 4,376
Write-down of Information Please LLC........................................... (2,655) - -
Unallocated corporate and other expenses....................................... (10,530) (18,595) (8,979)
-------- -------- -------
Consolidated (loss) income before provision for income taxes................... $(61,836) $(20,604) $ 2,504
======== ======== =======
Reconciliation Information
Assets
2000 1998
------- --------
(In thousands of dollars)
Total assets for reportable segments........................................................ $32,669 $ 92,582
Cash and equivalents and marketable securities.............................................. 36,010 54,057
Restricted marketable securities............................................................ - 6,526
Total assets for unallocated corporate and other functions.................................. 11,910 10,054
------- --------
Consolidated total assets................................................................... $80,589 $163,219
======= ========
Note 16. Subsequent Events
On April 11, 2000, the Company announced that as part of its review of
strategic alternatives, which began in February 2000, the Board of Directors
determined that the most appropriate means to enhance shareholder value is for
the Company to remain independent and to focus all of its energies on its
DynaBase dynamic Web publishing system. As a result, the Company will pursue the
divestiture of its other assets, including the Information Exchange Division.
In line with this decision, the Company will immediately begin a corporate
reorganization designed to concentrate its operations in the DynaBase business,
which is a part of the eBusiness Technologies ("eBT") division. As part of this
management reorganization, the Company will close its headquarters in Boston
during May and will consolidate all corporate functions in Providence at eBT's
current offices. As a result, the majority of the Boston-based corporate
personnel will leave the Company in May, with a small number of personnel
relocating to Providence.
The Company's Board of Directors has determined that the Information
Exchange Division should be separated from the DynaBase business. Accordingly,
the Company is seeking acquirers for IED, which will be operated separately
pending such a transaction.
57
Inso Corporation
Schedule II. Valuation and Qualifying Accounts
Years ended January 31, 2000, December 31, 1998 and 1997 and
one month ended January 31, 1999
Balance at Additions Additions Balance
beginning due to charged to costs Amounts Reductions at end
of year acquisitions and expenses written off due to sales of year
---------- ------------ ---------------- ------------ ------------ ----------
2000
Allowance for doubtful
accounts................... $1,938,000 $ - $1,217,000 $ (751,000) $(944,000) $1,460,000
Allowance for returns and
refunds.................... 2,041,000 - 791,000 (1,153,000) - 1,679,000
---------- -------- ---------- ----------- ------------- ----------
Total....................... $3,979,000 $ - $2,008,000 $(1,904,000) $(944,000) $3,139,000
1999 (one month)
Allowance for doubtful
accounts................... $2,043,000 $ 25,000 $ - $ (130,000) $ - $1,938,000
Allowance for returns and
refunds.................... 2,063,000 - - (22,000) - 2,041,000
---------- -------- ---------- ----------- ------------- ----------
Total....................... $4,106,000 $ 25,000 $ - $ (152,000) $ - $3,979,000
1998
Allowance for doubtful
accounts................... $1,662,000 $438,000 $ 506,000 $ (563,000) $ - $2,043,000
Allowance for returns and
refunds.................... 748,000 - 2,538,000 (1,223,000) - 2,063,000
---------- -------- ---------- ----------- ------------- ----------
Total....................... $2,410,000 $438,000 $3,044,000 $(1,786,000) $ - $4,106,000
1997
Allowance for doubtful
accounts................... $1,233,000 $138,000 $ 721,000 $ (430,000) $ - $1,662,000
Allowance for returns and
refunds.................... 561,000 - 391,000 (204,000) - 748,000
---------- -------- ---------- ----------- ------------- ----------
Total....................... $1,794,000 $138,000 $1,112,000 $ (634,000) $ - $2,410,000
58
Item 14(a)3. Exhibit Index
Exhibit Description Page
- ------- ----------- ----
2.1 Share Exchange Agreement and Agreement and Plan of Merger among Inso Corporation, Tabasco Corp., *
Sherpa Systems Corporation and The Selling Stockholders named therein, incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 4, 1998, filed with the
Commission on December 18, 1998.
2.2 Asset Purchase Agreement dated March 31, 1998, by and among Inso Corporation, Inso Dallas *
Corporation, Inso Florida Corporation and Lernout & Hauspie Speech Products N.V., incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 23, 1998, filed
with the Commission on May 7, 1998.
2.3 Purchase and Sale Agreement dated October 18, 1999, by and among Inso Corporation, Inso Providence *
Corporation and ViewPort Development AB and Enigma Information Systems Ltd. and Enigma, Inc. and the
First Amendment of the Purchase and Sale Agreement dated as of October 28, 1999 by and among Enigma
Information Systems Ltd. and Enigma Information Retrieval Systems, Inc. and Inso Corporation, Inso
Providence Corporation and ViewPort Development AB, incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated October 29, 1999, filed with the Commission on November
15, 1999.
2.4 Stock Purchase Agreement dated January 5, 2000, between Inso Corporation and Structural Dynamics *
Research Corporation, incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated January 5, 2000, filed with the Commission on January 20, 2000.
3.1 Restated Certificate of Incorporation of the Company dated June 21, 1996, incorporated by reference *
to Exhibit 4.1 to Registration Statement Number 333-06845 on Form S-8 filed with the Commission on
June 26, 1996.
3.2 Restated By-laws of the Company, incorporated by reference to Exhibit 3.2 to the Company's Annual *
Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the Commission on March
31, 1999.
4.1 Proof of Common Stock Certificate of the Company, incorporated by reference to Exhibit 4 to the *
Registration Statement No. 33-73996 on Form S-1 filed with the Commission on January 12, 1994 (the
"Form S-1").
4.2 Rights Agreement, dated July 11, 1997, by and between Inso Corporation and State Street Bank & Trust *
Company, as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated July 11, 1997, filed with the Commission on July 16, 1997.
4.3 Amendment No. 1 to Rights Agreement, dated as of October 27, 1999, by and between Inso Corporation *
and State Street Bank & Trust Company, as Rights Agent, incorporated by reference to Exhibit 2 to
the Company's Registration Statement of Form 8A/A, filed with the Securities and Exchange Commission
on October 28, 1999.
+10.1 Inso Corporation 1993 Stock Purchase Plan, as amended, incorporated by reference to Exhibit 10.1 to *
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the
Commission on March 31, 1999.
+10.2 Inso Corporation 1993 Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10.4 to *
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
+10.3 Inso Corporation 1996 Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the
Commission on March 31, 1999.
+10.4 Inso Corporation 1996 Non-employee Director Plan, as amended, incorporated by reference to Exhibit *
10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed
with the Commission on March 31, 1999.
+10.5 Inso Corporation Restated 401(k) Plan dated October 1, 1997, incorporated by reference to Exhibit *
10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed
with the Commission on March 31, 1999.
59
10.6 Office Lease, dated November 30, 1994, by and between the Company and MBL Life Assurance Corporation, *
incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
10.7 Lease to Premises, dated December 27, 1995, by and between Inso Chicago Corporation and International *
Business Machines Corporation, incorporated by reference to Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
10.8 Lease to Premises, dated March 6, 1997, by and between Inso Providence Corporation and The Foundry
Associates, L.P., incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, filed with the Commission on March 31, 1999.
+10.9 Pledge Agreement, dated December 16, 1997, by and between the Company and Bruce G. Hill, *
incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
+10.10 Form of Management Retention Agreement by and between Inso Corporation and certain of its corporate *
officers, incorporated by reference to the Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, filed with the Commission on March 31, 1999.
+10.11 Agreement and Release between Michael Melody and the Company dated April 2, 1999, incorporated by *
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1999, filed
with the Commission on June 14, 1999.
+10.12 Agreement and Release between Graham Marshall and the Company dated May 6, 1999, incorporated by *
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July
31, 1999, filed with the Commission on September 14, 1999.
+10.13 Amended and Restated Separation Agreement and Release between Paul A. Savage and the Company dated *
June 10, 1999, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1999, filed with the Commission on September 14, 1999.
+10.14 Amended and Restated Separation Agreement and Release between Betty J. Savage and the Company dated *
June 11, 1999, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1999, filed with the Commission on September 14, 1999.
+10.15 Agreement Relating to Warrants of Inso Corporation dated June 22, 1999, incorporated by reference to *
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999,
filed with the Commission on September 14, 1999.
+10.16 Separation Agreement and Release by and between Steven R. Vana-Paxhia and the Company dated *
September 28, 1999, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1999, filed with the Commission on December 15, 1999.
+10.17 Employment Agreement by and between Stephen O. Jaeger and the Company dated as of April 1, 1999, *
incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1999, filed with the Commission on December 15, 1999.
+10.18 Letter Agreement by and between Paul R. Anderson and the Company dated as of October 6, 1999, *
incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1999, filed with the Commission on December 15, 1999.
+10.19 Catastrophic Equity Protection Insurance Policy Number 859-62-16 by and between Illinois National *
Insurance Company and the Company, incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1999, filed with the Commission on
December 15, 1999.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule
____________
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement filed herewith, or
incorporated by reference, in response to Item 14(a)3 of the instructions
to Form 10-K.
60